Last Friday I noticed in a story on interest.co.nz this chart taken from a recent BNZ commentary.
I stuck it on Twitter and then to illustrate more starkly something about the contrast with the pandemic period followed up with this
In 2020 there was (inevitably) extreme uncertainty about the outlook for Covid, for any possible vaccine, for border restrictions, and (you might have thought) for what it all meant for inflation. By mid 2021 the conditions that gave rise to the worst outburst of core inflation in many decades were all in train, and yet the MPC seemed not to feel (or, at least, state) any particular uncertainty at all.
Quite what, if anything, it meant wasn’t really clear. Perhaps they really were pretty complacent back in 2020 and 2021 (as the time series chart shows despite the apparent magnitude of the shock, and the lack of precedents, “uncertain” was not being used a lot more than usual). Or perhaps this year’s heavy use of the term is some sort of reaction to past mistakes, or Trump just makes an easy target? Perhaps, having suddenly lost a Governor (who’d overseen all the other MPSs used in this chart), things went a little wild in the latest statement with the new and inexperienced guy in charge?
So I wondered what a similar chart looked like for other central banks. I had a look at the Reserve Bank of Australia, the Bank of England, and the Bank of Canada, all of whom publish similar documents on a quarterly cycle (Canada in Jan, Apr, July, the others in Feb, May and August).
Three things caught my eye:
First, how similar the RBA and RBNZ usage frequency has been through these episodes. Not identical but quite close
Second, how much more commonly the Bank of England was referring to uncertainty through the pandemic period. The most recent statement still has a lot more references than back then, but the contrast is much less stark. For the pandemic period I’d say that is to their credit.
Third, the Bank of Canada had the fewest uses of “uncertain” in all five periods, including – and most strikingly, given Canada’s vulnerability to US tariffs etc – in the most recent set of reports (the Canadian one came out on 16 April, the period of peak “Liberation Day” tariff concern globally).
I also had a look at the final Monetary Policy Statement/Report for 2019 for each central bank (wholly pre-Covid). As it happened, the Bank of England had used “uncertain” 214 times in their November 2019 document, mostly as regards Brexit.
I don’t want to draw any strong conclusions from any of this. And I don’t even particularly disagree with the MPC’s on-balance assessment of where the US tariff risks lie (mainly in a disinflationary direction for New Zealand), but you do have to wonder about just how they went so far over the top in last week’s document with the number of references to “uncertainty”. The Trump stuff matters – both the uncertainty about the policies themselves (and retaliation) and uncertainty about the economic impact – but it isn’t clear that the degree of uncertainty we (or the MPC) face is anything like that during the early months of the pandemic or (though they did not recognise it at the time) the big policy mistakes leading to outburst of core inflation that we are still living with the aftermath of.
And how does uncertainty compare now to that at the height of the financial crisis in 2008/09? I’d have thought that, particularly for monetary policy purposes, the financial crisis offered at least as much uncertainty for the global macro outlook (as it affected New Zealand) than the current tariff chaos. But judging by MPS uses of uncertainty, the Reserve Bank appears not to have thought so.
All a bit puzzling really. I wouldn’t make too much of it, but the data are perhaps something for the MPC to reflect on.
(Incidentally, in case anyone is wondering about the Fed, they don’t do a six-monthly statement. On the couple of occasions when the dates aligned, including February 2025, they used “uncertain” less often than the central banks I looked at here.)
If you want to be Reserve Bank Governor, think you have what it takes, (and haven’t yet been approached by the Board’s recruitment company) you will need to get moving. Applications close on Friday.
As a reminder, much of the process (unusually by international standards) is controlled by the Bank’s Board, most of whom were appointed to their positions by the previous government. The Minister of Finance (and Cabinet) will finally make the choice, but they can only appoint someone the Board nominates. The Minister can reject a nominee – either before or after the (now required) consultation with other political parties represented in Parliament – but cannot impose her own candidate. I’m not aware that a recommended nominee has ever been rejected [UPDATE: I’m reminded that Michael Cullen rejected the Board’s nomination of Rod Carr], although in 2002 after Don Brash resigned it was understood that Helen Clark had made clear that she was not going to have a “Brash clone” appointed (hard luck for the acting Governor Rod Carr, who in those days had not really begun his migration to the left).
In practice, things can be less mechanical than the statutory model sounds (and, I believe, was intended to be). There is nothing to stop a Minister of Finance engaging with the Board before they advertise and making clear what sort of person s/he (the Minister) would or would not be looking for in an acceptable appointee. To me, that sort of engagement seems entirely proper. Much more questionably, there isn’t anything to stop the Board offering the Minister a menu of candidates and inviting her to pick one (this happened when the first external members were appointed, where the same statutory appointment process applies). How receptive the Board might be to such influence will, no doubt, depend. Stubborn Boards, with a strong sense of their own legitimacy, might be inclined to play by the letter of the law. Boards largely appointed by a previous government and having presided over things at the Bank going less than well, perhaps less so. It would be interesting to know what, if any, consultation there was with the Minister of Finance on the job description used to support the advert for the vacant Governor position.
(My own preferred model – a much more internationally conventional one – is that the Minister (and Cabinet) should be able to appoint her own person as Governor, taking advice no doubt from the Board and from her principal economic advisers at The Treasury. The government cannot escape responsibility for the Bank, and the powerful impact of its (good or bad) choices, and should be free to choose, not constrained by any Board, let alone one (a) appointed largely by the previous government, and b) with such a demonstrably poor record.)
These are key competencies etc they claim to be looking for
Might we guess that that third item, in particular that reference to “drivers of competition” might have come from – or been included to anticipate – the Minister? It is an odd one otherwise, given that promoting (or otherwise) competition isn’t really a part of the Bank’s responsibilities (think monetary policy, prudential regulation, and monopoly issue of notes and coins). But if they want someone to encourage the reintroduction of banknote competition it would be obscure, but I’m all for it.
I guess we should be encouraged that subject expertise seem to rank high on the list of required competencies, even if “strong understanding” may be weaker than it sounds, especially when contrasted with the “detailed knowledge” required on the subjects in the third bullet.
But the items that really caught my eye were further down the page.
First, there was that experience criterion “preferably at CEO level”. Since the Reserve Bank was given operational autonomy, three of the four Governors had had previous CEO experience (Wheeler was the exception). Internationally, I think it is less common (over the same period I think one of four of each of Bank of England and RBA Governors had previous CEO experience, and perhaps 2 of 6 at the Bank of Canada). Highly successful organisations tend to build the capacity to promote from within, which militates against past CEO experience while favouring actual subject expertise, but the last internal appointee to the Reserve Bank Governor role left in May 1984.
Second, there was this: “Have the personal resilience to cope with adverse and stressful circumstances and to withstand both justified and unjustified criticism.” It could hardly have been more pointed in its contrast to Orr, and I suppose it speaks to the credit of the Board that they (apparently belatedly) recognised behaviours they had tolerated. I guess they could have added explicitly “the integrity not to actively mislead, or worse, Parliament, or to abet such behaviours from a superior”.
Third, there is that odd requirement (odd to make it so explicit) about reviews, with the explicit expectation that the appointee “respond in an open-minded manner to any recommendations received”. Pretty basic stuff you’d have thought, but…..not from Orr.
And then there is the woke stuff. Of course, it might be a trick question – the Treaty of Waitangi is not mentioned in the Reserve Bank Act at all and perhaps not all applicants would have done their homework sufficiently to know, but it is probably just a continuation of the whims and preferences of Orr/Quigley and the former Labour government. Among other things, it might be thought to discourage really able overseas applicants (even if in the end it is unlikely to be make or break for the Board in coming to nominee to send to the Minister).
I also took a look at what the Board had advertised for in 2017 (post here), bearing in mind that Neil Quigley was chair of the Board then too. Arguably the 2017 advert was a little more ambitious in the quality of the person being sought, although as I quibbled then with some of the points they’ve now taken out I wouldn’t make much of it. Perhaps the only point worth making is that instead of someone with “outstanding intellectual ability” and “gravitas” they gave us Orr. The 2025 advert is broadly enough framed that really almost anyone could end up chosen. And neither advert put any sort of emphasis on change management or a vision for a different and better-performing Bank.
I note here just briefly again how extraordinary it is that Neil Quigley is still driving this process. When you were responsible for the nomination and reappointment of the previous Governor who did so poorly on multiple fronts and then walked off with no notice, when you were responsible for the Bank (a) setting budgets last year far in excess even of what Grant Robertson had allowed them, and b) bid for that to be new baseline, despite a climate of wider spending restraint on most agencies, you really shouldn’t be driving the selection of the next Governor. Oh, and when you were responsible – with the previous Governor – for keeping experts off the first MPC, and then later actively misled Treasury and the public about that blackball. It remains beyond comprehension why Willis reappointed him last year – although only for two years, clearly not envisaging that he would drive the performance of the next Governor – or why she has not prevailed on him more recently to step aside. The government has been advertising for two new Board members, but it seems unlikely they will even be in place before much of the winnowing process – including the guidance to the search firm – has already happened.
But who might emerge?
We haven’t seen much media commentary for a couple of months now. I haven’t seen any new names for quite some time (well, apart from the smart person who has tried a couple of times to convince me that Bill English will end up as next Governor). In one of my earlier posts, shortly after Orr resigned, I had these names from various newspaper columns and my own speculations:
(I think I also saw Karen Silk’s name in one article, surely only because someone was uneasy that there were no other women on any of the lists).
If you search this blog you can probably find posts with thoughts on McDermott, Archer, and Bascand. I won’t repeat that here.
All have had some background at the Reserve Bank, and quite a few at overseas central banks or central banking related institutions (IMF, BIS). Four (Grimes, Bascand, McDermott, Hansen) have some chief executive experience.
I don’t think any of these people would be ideal for the role now, but a lot depends on what the Minister really wants, and how much she cares about a better performing Bank. And several of these people may have no interest whatever in the role – whether from age, or inclination (better things to do with your life than 70 hours a week, endless meetings and bureaucracy, lot of travel etc). Archer – who would probably be very much the sort of candidate of bold and far-reaching change, backed by intellectual rigour etc – has lived abroad for more than 20 years now (we share the dubious responsibility of being trustees of the ill-governed Reserve Bank superannuation scheme). In key public sector appointments to date, the government has more often tended to recycle established figures.
Several of those names might count as, or risk being, establishment or status quo candidates. One could think of Bascand, probably not interested, or Gai (appointed to the FMA Board by the previous government, appointed to the MPC by this government, and while undoubtedly able has never once expressed even a jot of public concern through the Orr years, despite all that “critic and conscience” role of academics). And Hawkesby.
Hawkesby is, at present, the temporary Governor (six month stint while the permanent appointment is made). The last long-term acting Governor (Rod Carr) never made it to Governor, and left the Bank within a year of missing out. Hawkesby’s day job is Deputy Governor and head of the Bank’s burgeoning financial stability and regulatory functions. He has some things in his favour. First, the Board knows him (and will have seen at least a couple of months as acting Governor, including having wielded the knife to shrink the badly-bloated top management group). Second, he is a decent person, and it is very unlikely that he would be found repeatedly actively misleading FEC or the media (last week’s appearances, after Orr, were a breath of fresh air). And, third, he has an interesting range of relevant background (Reserve Bank in two stints, Bank of England, Harbour Asset Management – was that 3rd bullet put there for him?) And, fourth, he is closer to the age one might ideally be looking for in a longer-term Governor (I think appointees in their late 60s would be less than ideal).
All that said, I think it would be a bad appointment, for multiple other reasons. First, there is little or no sign of any real intellectual or policy depth (check out the various speeches he has given since rejoining the Bank in 2019). We have little or no insight on how, or what, he thinks (if anything) beyond the wholly conventional. Second, he has served on the MPC for its entire six year term so far, and was Assistant Governor responsible for monetary policy, markets, and macro during the height of the pandemic period, when the huge policy misjudgments (LSAP and the length of the period when the OCR was left well below neutral, even as inflation was blowing out) were made. Third, he was Orr’s handpicked deputy (the vacancy was never advertised when Geoff Bascand announced his resignation), through a much wider range of mistakes and misjudgements (down to and including last year’s budget and the last gasp big expansion in staff numbers). Fourth is a related point: no one survives in Orr world if they challenge him or disagree materially with him. Hawkesby survived, presumably by (at best) just keeping his head down, or at worst going along with it all (inappropriate jokes – per Paul Conway – and all). He sat alongside Orr on various occasions when his boss actively misled FEC, and never said a word of correction or clarification. Hawkesby has ability, but my view has consistently been that he was appointed and served at one level above his actual capability at the time (thus, when Orr headhunted him to be the Assistant Governor for monetary policy and markets, he might have been a very good appointment as Head of Financial Markets). He may be appointed Governor, but if it happens it will be a mark that neither the Minister nor the Board really care much about a world class central bank. But, as I say, he probably wouldn’t lie to FEC. A low bar, but we have to start somewhere.
What of other people? I rule out the Bill English suggestion (yes, former Ministers of Finance have become central bank Governors elsewhere, but usually when they’ve previously been well-regarded economists, and it would be highly desirable to have an appointee the political parties in Parliament were broadly comfortable with and confident in). But there must be people out there with stronger private sector experience, and yet some of the skills/experience one might normally look for in a central bank head. Craig Stobo, for example, is currently the chair of the Financial Markets Authority and is thoughtful on economics and markets issues (even if weirdly running commentary on The Platform on all manner of other policy and economic topics, including last week’s MPS). Or Andrew Bascand (Hawkesby’s former boss at Harbour, and ex RBNZ and BOE)? Or…..or…..or? (Just not Orr or Orr-like, please…….)
Remember, applications close on Friday. In several months’ time we’ll know who has got the nod.
I’ve put the full advert and job description text below for future reference (since the link at the start of the post will no doubt be taken down in the coming weeks).
Recruitment process for new Governor of the Reserve Bank of New Zealand
The Board of the Reserve Bank of New Zealand Te Pūtea Matua has started the search and recruitment process to identify a new Governor.
Published:
23 May 2025
Recruitment process
The Board’s statutory responsibility is to nominate a candidate to the Minister of Finance, who then makes a recommendation to the Governor General for appointment.
The Board has engaged the executive search firm Heidrick and Struggles to help with the search and recruitment process.
The advertising and search activity will run throughout May and June, with interviews and assessments in July and August, followed by a nomination to the Minister of Finance. The Minister will then consult with political parties and make a recommendation to the Governor General for appointment. See Reserve Bank of New Zealand Act 2021.
Position Description for the Governor of the Reserve Bank of New Zealand
Key functions and responsibilities The Governor performs the role outlined in the Reserve Bank of New Zealand Act 2021 (the Act). In particular, the Governor is the: a. Chief Executive of the Reserve Bank b. a member of the Board of the Reserve Bank c. Chair of the Monetary Policy Committee (MPC). The Governor is responsible for performing and exercising functions and powers delegated by the Board.
Chief Executive role
The extent of the Board’s delegation to the Bank is outlined in the Board’s current Delegation Policy; however, it is anticipated for the purposes of this job description that the Board:
Will delegate the management authority to the Governor for the day to day running of the Bank.
Will delegate regulatory statutory powers to the Governor.
The delegation of day-to-day management authority will exclude any matters the Board reserves to itself for decision making.
The delegation of regulatory statutory powers will be subject to a framework laid out in the Delegation Policy for the referral of particular matters to the Board for either decision or guidance.
The carrying out by the Governor of any powers, functions, duties, authorities or discretions (or the carrying out by preapproved people he or she sub delegates to) must all times be consistent with policy and frameworks set by the board and any applicable Bank policies. The Governor is responsible for ensuring that relevant and sufficient information flows to the board and to support the board and its individual members in fulfilling their collective and individual duties outlined in Part 2, Subpart 4 of the Act. The Governor will be a key spokesperson and representative for the Bank in its external relations and carries significant responsibility for effective communication by, and the image and standing of, the Bank.
Board member role The Governor is a Board member of equal standing to other Board members and shares the collective authority and responsibility of members as outlined in section 24 of the Act.
Chair of MPC The Governor is the Chair of MPC with the responsibilities outlined in the Act, Charter and Code of Conduct. These responsibilities include convening chairing meetings of the MPC and being the official spokesperson for the MPC.
Criteria for appointment / key competencies The Governor will:
Have a strong understanding of monetary economics and monetary policy.
Have a strong awareness and understanding of financial policy and regulatory frameworks.
Have a detailed knowledge of domestic and international financial markets and drivers of competition.
Be familiar and up to date with best practice risk management frameworks applicable to the Reserve Bank.
Have advanced relationship management, influencing and communication skills, sufficient to successfully manage relationships with the Minister of Finance and other senior government ministers, opposition political parties, media, leaders in supranational financial institutions and peer central banks and regulators, regulated entities, other public agency CEOs, Iwi leaders and all members of the community.
Have a sound understanding of public policy decision making processes.
Have the ability to lead the effective deployment of the Reserve Bank’s resources and demonstrate performance achievements in a public sector environment.
Have a successful record of setting and leading a strategic path for a complex, multi faceted organisation. Have in-depth management experience of a substantial entity, preferably at CEO level.
Have the personal resilience to cope with adverse and stressful circumstances and to withstand both justified and unjustified criticism.
Have the capability to periodically commence external reviews of aspects of the Reserve Bank’s functions (including monetary policy), responding in an open-minded manner to any recommendation received and implement change processes as appropriate.
Highly developed cultural capability, particularly concerning Te Ao Māori, and awareness of the role of Te Tiriti O Waitangi
Demonstrate exemplary leadership skills: o Undoubted integrity. o Empathy and emotional intelligence. o Sound judgement and decision making. o Openness to new ideas. o Highly developed inter-personal skills. o Ability to develop human capital of an organisation.
In both The Post and the Herald this morning there are reports of interviews with executive members of the Reserve Bank’s Monetary Policy Committee: the Bank’s chief economist Paul Conway in The Post and his boss, and the deputy chief executive responsible for monetary policy and macroeconomics, Karen Silk in the Herald. In a high-performing central bank the holders of these two positions should be the people we look to for the most depth and authoritative background comment on monetary policy and economic developments. But in New Zealand we are dealing with the legacy of the Orr/Quigley years where we struggle to get straightforwardness, let alone depth and insight.
Now, to bend over backwards to be fair, interview responses will depend, at least in part, on what the journalist concerned chooses to ask. But then standard media training advice is to answer the question you wish they’d ask, not (necessarily or only just) the one they did. An interview with a powerful decisionmaker is a platform for the decisionmaker.
The Conway interview appears somewhat meandering and not very focused. I wanted to touch on three sets of comments in it.
First, asked about the transition after Adrian Orr’s sudden (and unexplained) departure, he says it is business as usual and it has been “a very smooth transition”.
“I think this institution is bigger than even Adrian Orr [it was certainly bigger – much bigger – as a result of Adrian Orr]……There’s a real sense of the ‘show must go on’ and it really has. We miss Adrian. It is a bit less fun around the place, less jokes going on – probably more appropriate jokes”, he smiles again.
So in addition to Orr being a bully, an empire builder, and someone well known for freezing out challenge and dissent, he also created an uncomfortable and inappropriate working environment? Or at least that is what Conway appears to be saying about the man who recruited him.
But you also wonder about just how straight Conway is being (and why the journalist didn’t ask more). After all, the Bank itself tells us there are big changes afoot (presumably consequent on the new Funding Agreement, prospect and actual). In the just over two months since Orr resigned, the top tier of management has been brutally slimmed down (credit to Hawkesby). At the start of March there was the Governor and an Executive Leadership Team of seven Assistant/Deputy Governors and one “Strategic Adviser”. Since then, Kate Kolich, Greg Smith, Sarah Owen, Simone Robbers and Nigel Prince have all either left already or we’ve been advised they will soon be doing so (none with an announced job to go to). Governor plus eight has been reduced to Governor plus four. And
That first group is Conway’s own level (though presumably the Bank will continue to need a chief economist). And then on down to the staff (and much of this is because Orr/Quigley massively blew the budget limit Grant Robertson had set for them and went on one last hiring spree last year). You somehow suspect that all is not exactly sweetness, light, and engagement at the Reserve Bank.
And then there was this
Conway is on record as a bigger-government sort of guy (we had his extra-curricular stuff last year, as an example) but what possessed him, interviewed as an MPC member and senior central banker, to suggest that more state interventions and bigger government might be “worth thinking about”? It simply isn’t in his bailiwick, and he shouldn’t have allowed himself to be dragged into responding to a hypothetical, especially about one outside the Bank’s responsibilities.
And finally, we got the meandering thought that “it’s possible that we get to a point where people just adjust their behaviours and ‘uncertainty’ becomes the new normal and we just get on with it. I’ve got no ’empirics’ to base that on – it’s just, I think, a very interesting thought-stream.”
Really? A “very interesting thought-stream” that people do in fact adapt to the world as it is? Startling and insightful (not).
Then, of course, there is his boss, Silk. Most serious observers regard her as fundamentally unqualified for her job, and not the sort of person who would be likely to be on an MPC anywhere else in the world, let alone as the deputy primarily responsible for monetary policy. She can be counted on to safely deliver speeches on operational topics that others have written for her, and to answer purely factual questions at MPS press conferences and FEC about what has happened to swap yields and mortgage rates. And that is about all.
She also seems to have a mindset in which rates being paid on existing mortgages are what matter rather than the rates facing marginal borrowers and purchasers. Perhaps it is what comes from a non-economics background in a bank? Thus, in the Herald interview we are told that she claimed that “the effects of the 225 basis points of OCR cuts the committee had delivered in less than a year were yet to be widely felt”. The journalist added some RB data on average actual mortgage rates which might appear to back that up. Of course, expected cash flows matter as well as actual ones – if your fixed rate mortgage is going to roll over in a couple of months onto a much lower rate that will almost certainly be affecting your comfort, confidence, and willingness to spend now. But more to the point, marginal rates for people looking at buying a property or otherwise taking on new debt have come down a long way, and were already down a long way months ago. This chart is from the Bank’s own website, showing short-term fixed mortgage rates.
As at yesterday, rates were a few basis points lower again than the end-April rates shown here. 200 basis points plus down from the peak, and that not just yesterday. And falling wholesale rates, which underpin these falls in retail rates, also affect the exchange rate, another important part of the transmission mechanism. (And, of course, with all Silk’s focus on the cash flows of existing borrowers, she never ever mentions the offsetting changes in the cash flows for existing depositors – I’m of an age to know!)
So far, so predictable (at least from Silk). But then there was this (charitably I’ll assume the word “fulsome” was not hers)
Reasonable people might differ over the inflation outlook and the required future path for the OCR, except that we were told in the MPS that there was unanimous agreement from the MPC to the forecast path for interest rates. And that is a path that is lower from here than the path published (again unanimously) in the February MPS (the deviation begins after the May MPS, not at it). In other words, not only did the February path show some further easing from (where they expected to be, and were, by) May onwards, but the May path shows even more easing from here forward.
And yet Silk talks of a “much stronger easing signal” sent in February.
Frankly, they seem all over the place. If the Committee (as it did) unanimously agrees to publish a (somewhat) steeper downward track than the one you had before then either you have an easing bias – always contingent on the data of course – or you made a mistake in adopting the track you did. And if you are comfortable with the track, it feels like a mis-step for the temporary fill-in Governor to announce that there was no bias. I guess Silk might have got stuck having to cover for her fill-in boss, but it is a pretty poor look all round. Surely (surely?) they must have rehearsed lines about biases before the press conference? Surely, if so, someone pointed out the disconnect between the proposed words and the chart above?
And finally from Silk we learn that “price stability is one of the conditions you need for growth”. It simply isn’t – and the economists on the committee are usually much more careful, with the standard central banker line being that price stability, or low and stable inflation, is the best contribution monetary policy can make (many muttering under their breath that that contribution isn’t necessarily very large). Not to labour the point but the economy was still growing, reaching its most overheated point in late 2022, when core inflation was around its worst.
All in all, not a great effort at communications from the MPC this week. As I noted in my post on Thursday, there was none of the prickly frostiness of Orr, and no sign of deliberately or conscious setting out to mislead Parliament, but it simply wasn’t a very good performance. And while Hawkesby is new to the role, chairing MPC and acting as its prime spokesperson on the day, Conway and Silk have no such excuse. Someone flippantly suggested that perhaps there is something about May and the MPC – last May was when the MPC went a bit wild talking of raising rates further (the OCR was still going to be above 5 per cent by now), and then Conway tried to blame his tools, rather than the judgements of him and his colleagues, for the associated forecasts.
If the government is at all serious about a much better, world class, Reserve Bank, they need to work with the Board to find a Governor who will lift the game and the Governor/refreshed Board will need to work with the Minister to produce a stronger MPC. It would seem unlikely that in such an improved Bank/MPC there would be a natural place for either Conway or Silk, pleasant enough people as they may be.
Procrastinating this morning, I asked Grok to write a post in my style on yesterday’s Monetary Policy Statement. Suffice to say, I think I’ll stick to thinking and writing for myself for the time being. Among the many oddities of Grok’s product was the conviction that Adrian Orr was still Governor. Mercifully that is not so, even if – despite all the questioning yesterday – we are still no closer to getting straight answers on the explanation for the sudden, no-notice, accelerated departure of the previous Governor. Perhaps responses to OIAs will eventually help, but some basic straightforwardness from all involved – but especially Quigley and Orr himself – would seem the least that the public is owed, especially after all the damage wreaked on Orr’s watch.
Yesterday’s Monetary Policy Statement certainly made for a pleasant change of tone. Stuff’s Luke Malpass captured it nicely: “A lack of journalists being upbraided at times for not reading the materials in the hour allowed, or for asking the wrong question, was a change from previous management”. I watched about half of the Bank’s appearance at FEC this morning, and it was as if it was a whole different Bank. Not necessarily any deeper or more excellent on substance, but pleasant, respectful, engaged people accounting to Parliament, as they should. And, setting the standards low here, there wasn’t any sign of attempts to actively mislead or lie to the committee (Orr, just three months ago in only the most recent example).
I don’t have any particular quibbles with yesterday’s OCR decision. It was probably the right thing to do with the hard information to hand, but we won’t know for quite some time whether it really was the call that was needed. The NZIER runs a Shadow Board exercise before each OCR decision where they ask various people (mostly, but not all, economists) where they think the OCR should be at this review and in 12 months time, and invites them to provide a probability distribution. I’m not part of that exercise but I put my rough distributions on Twitter earlier in the week (in truth the blue bars should probably have been distributed in a flatter distribution – we really do not know)
The Bank’s projection for the OCR troughs early next year at 2.85 per cent and, as the scenarios they present reinforce again, there is a great deal of uncertainty about just what will be required (and not just because of the Trump tariff madness and associated uncertainty).
One of the interesting aspects of yesterday was that for only the second time in the six year run of the MPC that there was a vote (5:1 for a 25 point cut rather than no change). But, of course, being the non-transparent RBNZ we do not know which member favoured no change, so cannot ask him or her to explain their position, let hold them to account or credit them when time reveals whether or not it was a good call. As it happens, despite the vote the MPC reached consensus on a forecast track for the OCR and since that track embodies a rate below 3.5 per cent as the average for the June quarter and yesterday’s was the final decision of the June quarter, I’m not sure what to make of what must really have been quite a small difference. The bigger issue remains that there is (almost always) huge uncertainty about what monetary policy will be required over the following three years (the standard RB forecast horizon) and yet never once has any MPC member dissented from the consensus track. Groupthink still appears to be very strong. And notwithstanding the Governor’s claim that there is “no bias” one way or the other for the next move or the next meeting, the track – which all the MPC agreed on – clearly implies an easing bias (even if not necessarily a large one for July rather than August).
Hawkesby, unprompted, was yesterday championing the standard approach under the agreement with the Minister which enjoins the committee to seek consensus and only vote as a last resort. He acknowledged it is now an unusual model internationally, but claims it was preferable because it means – he claims – that everyone enters the room with a completely open mind about what should be done, whereas in a voting model people tend to enter the room with a preconceived view. Perhaps it sounds good to them, but it simply doesn’t ring true (and there is no evidence their model – which, among other things, saw them lose the taxpayer $11bn – produces better results in exchange for the reduction in transparency and accountability.)
It rang about as false as yesterday’s claim from the chief economist that the uneventful (in markets) transition when Orr resigned was evidence for the desirability of the decisionmaking committee. I’m all in favour of a committee (although a better, and better designed committee) but my memory suggested (and the numbers seem to confirm) that there were also no market ructions when Don Brash resigned, in the days of the single decisionmaker model.
There were a few things worth noting in the numbers. First, the Reserve Bank expects much weaker GDP growth than the Treasury numbers released with the Budget last week (Treasury numbers finalised in early April)
and as a result, significant excess capacity persists for materially longer than in the Bank’s February forecasts
And I’m still not sure where the rebound (above trend growth reabsorbing all the excess capacity) is really supposed to come from, on their telling, given that the OCR is still above their longer-term estimate of neutral, and never drops below it in the projection period. Reasonable people can differ on where neutral is likely to be (when the OCR was last at this level, less than three years ago, the Bank thought neutral was nearer 2%, now they estimate close to 3%), but it is the internal consistency (or lack of it) that troubles me.
I had only two more points to make, one fairly trivial, but the other not.
The trivial one first. In the minutes there was this paragraph about the world economy.
I don’t have any trouble with the (“weak world”) bottom line, but two specific comments puzzled me. The first was that difference in tone in the commentary on fiscal policy in China and the US: one might use “sizeable fiscal stimulus” (with no negative connotations) and of the other (and much more negatively) “fiscal policy could place strains on the sustainability of its public debt”. It wasn’t at all clear that the MPC realises that China’s government debt is almost as large as the US’s, and as a share of GDP has been increasing (and is expect to increase) much more rapidly than that of the US.
In a similar vein, this chart from the recent IMF Fiscal Monitor suggests that on IMF estimates China is already in a deeper fiscal hole, needing more fiscal adjustment (% of GDP) than the US to stabilise government debt.
Of course, the rest of the world is much more entangled with US government debt instruments than with Chinese ones, but it was a puzzling line nonetheless.
I’m also at a loss to know quite what the MPC was getting at with the line about ‘the decline in the quality of macroeconomic institutional arrangements [was] likely to result in precautionary behaviour by firms and households’. Not only is it not clear what decline they are talking about – are the Fed and the ECB not still independent, and the PBOC still far from it, and fiscal policy seems to have been on its current track for some years (in multiple countries). Is Congress bad in the US? For sure, but it has been so for a long time. I guess it might have been the relaxation of the German debt brake they had in mind, but….probably not. I was also a bit unsure how all this was supposed to play out. If, for example, there was an increased perceived risk of government debt being inflated away, wouldn’t the rational reaction be to increase purchases of goods and services on the one hand, and real assets on the other to get in before the inflation? Private indebtedness tends to rise when interest rates are modest and inflation fears are rising. In the end, who knows what they meant. Which isn’t ideal. They should tell us.
The more important issue is the Reserve Bank’s treatment of fiscal policy, where the bad old ways of Orr were again on display yesterday, in ways that really should undermine confidence in the Bank’s analytical grasp (and, frankly, its willingness to make itself unpopular by speaking truth in the face of power).
In his press conference yesterday the temporary Governor was asked about the impact of the Budget on the projections and policy decisions. He noted that they were glad to have all the information but that really it hadn’t made much difference, noting that any stimulus from the Investment Boost policy was offset by the impact of spending cuts. This is made a little more specific in the projections section of the document (a small increase in business investment, and on the other hand “on net, lower government spending reduces inflationary pressure”).
Readers with longer memories may recall that this issue first came to light a couple of years ago. Until then, for many years, the Bank had presented the impact of fiscal policy on demand primarily through the lens of the Treasury’s fiscal impulse measure, which had originally been developed for exactly that (RB) purpose. The Treasury has made some changes to that measure a few years ago which, in my view, reduce its usefulness to some extent, but certainly doesn’t eliminate it. Treasury continues to present the numbers with each Economic and Forecast Update. The basic idea is that increased taxes reduce aggregate demand and increased spending increases demand, but (for example) some spending is primarily offshore and thus doesn’t directly affect domestic demand. It is a best approximation of the overall effects on domestic demand of changes in fiscal policy. You can have a positive impulse while running a surplus (typically, if the surplus is getting smaller) or a negative one with a deficit (typically, if the deficit is getting smaller). It is straightforward standard stuff.
And yet two years ago the Bank simply stopped talking about this approach and replaced it with an exclusive focus on government consumption and investment spending (ie excluding all transfers – a huge component of spending – and the entire revenue side). This sort of chart has appeared ever since
and, probably not coincidentally, projections of (real) government consumption and investment have been trending downwards over that entire period. (This was the same vapourware I referred to in Monday’s fiscal post, where both Grant Robertson and Nicola Willis have repeatedly told us – and Treasury – that future spending will be cut.).
Back when this started, I OIAed the Bank for any research or analysis backing this change of approach. Had there been any of course they would already have highlighted it. There was none. But the switch had allowed the Governor to wax eloquent about how helpful fiscal policy was being, even as by standard reckonings (Treasury, IMF, anyone really) that year’s Budget had been really quite expansionary, complicating the anti-inflation drive.
The temporary Governor – who is presumed to be seeking the permanent job – seems, whether consciously or not, to be engaged in the same sort of half-baked analysis that avoids saying anything that might upset the government. Yes, on the Treasury projections government consumption and investment spending are projected to fall. But what does the Treasury fiscal impulse measure show?
At the time of the HYEFU last December, the sum of the fiscal impulses for 24/25 and 25/26 fiscal years was estimated to be -0.47 per cent of GDP (with a significant negative impulse for 25/26, thus acting as a drag on demand). By the time of last week’s Budget, not only was the impulse for 25/26 forecast to be slightly positive (this is consistent with, but not the same as, the structural deficit increasing) but the sum of the impulses for the two year was now 0.7 per cent of GDP positive. Fiscal policy, in aggregate is adding to demand (and by materially more than estimated at the last update). And the incentive effect of Investment Boost on private behaviour is on top of that.
Absent some serious supporting analysis from the Bank or its temporary Governor for its chosen approach (focus on just one bit of the fiscal accounts), it looks a lot like an institution (management and MPC) that now prefers to avoid ever suggesting that the fiscal policy effects might ever be unhelpful. After all, all else equal a positive fiscal impulse reduces the need and scope for OCR cuts – and we all know (we see their press releases) how ministers love to claim credit for OCR cuts.
If there is a better explanation, they really owe it to us. If they aren’t any longer happy with Treasury’s particular impulse estimate, they have the resources to come up with their own. But there is no decent case for simply ignoring developments in the bulk of the fiscal accounts. Wanting the quiet life simply isn’t a legitimate goal for a central banker, and if Hawkesby continues with the dodgy Orr approach – and he has been part of MPC all along – it does call into question his fitness for the permanent job. It isn’t the Reserve Bank’s job, except perhaps in extremis, to be making calls on the merits or otherwise of the fiscal choices of governments, but they are supposed to be straight with us (and, by default, with governments) on the demand and activity implications of those choices. They aren’t at present.
After the discussion in my post yesterday on the Investment Boost subsidy scheme announced in the Budget I thought a bit more about who was likely to benefit the most from it.
The general answer of course is the purchasers of the longest-lived assets.
Why? Because if you have an asset which IRD estimates to have a useful life of 100 years, your straight line depreciation deduction normally would be 1% per annum for each of those 100 years. But under investment boost, you get to do almost the first 21 years of deductions in the first year (the 20% Investment Boost deduction plus your 0.8% normal depreciation), and then the annual deduction each year thereafter is reduced by a little. But money today is very valuable relative to money given up (ie higher taxable income because of reduced future annual deductions) decades hence.
If on the other hand, you have an investment asset that has an estimated life of only 5 years (and there are many of them) it would normally be depreciated (straight line) at 20% per annum. Under Investment Boost, you get to deduct 36 per cent in year 1, but that additional depreciation upfront is clawed back over only the following four years. The Investment Boost additional upfront deduction has a positive present value, but it is fairly modest for such short-lived assets.
And what are the longest-lived assets? They will mostly be buildings. And, as we know, last year the government (with Labour’s support) moved to abolish tax depreciation altogether on commercial buildings (with an estimated useful life in excess of 50 years).
And that hugely magnifies the advantage of the Investment Boost policy for purchasers of new commercial buildings. Not only are they very long-lived assets but because there is no general tax depreciation on these assets, there is no depreciation clawback. The 20 per cent Investment Boost deduction is just pure gift (recall that the actual value to companies of all these deductions is 28 per cent of the value of the deduction itself – the company tax rate).
I did a little illustrative exercise in the table below, comparing the present value of the Investment Boost deduction for three different types of assets: commercial buildings, a winch (which IRD estimates has a 10 year useful life), and a printer (IRD estimates a five year useful life). Under the policy, in year 1 you get to deduct 20 per cent of the value of the asset plus normal depreciation calculated on the remaining 80 per cent. I’ve evaluated each option using a discount rate of 5 per cent (choice of discount rate won’t change the relative story across assets).
On plausible scenarios, Investment Boost is much much more beneficial to purchasers of commercial buildings than it is to most other assets (eight times as much for the same capital outlay on an asset with a life of five years[but see update at end of post]). There are, of course, other business assets with longer useful lives than 10 years (my winch example) but if you skim through the IRD schedule not that many more than 15.5 years.
And this a sector that just a year ago the government thought should get no tax depreciation at all…..
And a reminder, per yesterday’s post, that the IRD Fact Sheet on this policy says that (new or extended) rest homes will get to benefit from this (substantial) deduction, but that rental accommodation built afresh for any demographics to live in will not.
I challenge you to find the intellectual coherence in that.
Of course, you wouldn’t have got from anything announced on Budget day the sense that new commercial building purchasers were going to be by far the biggest winners. The Minister’s press release on the policy talks of how
To achieve that growth, New Zealand needs businesses to invest in productive assets – like machinery, tools, equipment, vehicles and technology.
But not a mention of commercial buildings. And perhaps more strangely, there is no discussion at all in the IRD/Treasury RIS of which sectors will benefit most, let alone the consistency with last year’s policy initiative on tax deprecation for commercial buildings, or of the rather anomalous situation where some new commercial residential accommodation (rest homes) gets the subsidy, while most of that market doesn’t. Quite extraordinary really.
It needn’t have worked out that way. Had the policy been set up to allow (say) double the normal rate of depreciation, until the asset was fully depreciated – rather than a flat 20 per cent in the first year – then there’d have been no benefit for commercial buildings at all (and whatever the merits of that at least it would have been consistent from one year to the next). Doing it in combination with restoring tax depreciation for commercial buildings might have involved initial backtracking but would at least have the merit of some consistency and coherence now.
UPDATE: A commenter notes that I really should compare scenarios with replacement at the end of the asset’s useful life. That is right. It will matter for the absolute comparison between 5 and 10 year assets (reduces the PV margin of a 10 year asset to 15% or so), and for the absolute scale of advantage of commercial buildings, but – since there is no clawback at all in respect of commercial buildings – it does not change the point that Investment Boost most strongly favours commercial building investment. Moreover, and all else equal, an investor with even a mild degree of risk aversion would favour cash in hand (20% immediate deduction on a 100 year life asset) over the uncertainty of the deduction regime at each replacement of shorter-lived assets.
There were good things in the Budget. There may be few/no votes in better macroeconomic statistics and, specifically, a monthly CPI but – years late (for which the current government can’t really be blamed) – it is finally going to happen.
I went along to the Budget lock-up today (first time ever), mostly to help out the Taxpayers’ Union with their analysis and commentary.
At least from my (macroeconomist’s) perspective there were two areas to focus on when we were handed the documents at 10:30 this morning:
productivity and growth-oriented policy measures,
fiscal deficit etc adjustment
On the former, the government chose to title its effort today “The Growth Budget”. The Minister spoke today against a backdrop emblazoned repeatedly with that label.
You might remember that back in January the Prime Minister made a big thing of the need to accelerate growth in productivity and real incomes, not just on a cyclical basis. The Minister of Finance in announcing the Budget date in late January went further
They did not deliver.
There was a single growth-oriented initiative in the Budget; a provision under which firms will be able to write off 20 per cent of the cost of new investments in the first year, on top of the regular tax depreciation allowances. Whatever the substantive merits of the policy, the best Treasury estimate is that it will lift GDP by 1 per cent, but take 20 years to do so (the forecast gains are frontloaded, but even in five years time they reckon the level of GDP will have risen by only 0.5 per cent relative to the counterfactual). If that looks small, bear in mind that Treasury’s number seem to assume that this measure may actually worsen overall productivity as the Minister’s press release says they estimate the capital stock will rise by 1.6 per cent and wages will rise by 1.5 per cent (at her press conference she said this was because more people would be employed).
And that’s it. This in an economy where there has been no multi-factor productivity growth now for almost a decade (chart from Twitter this morning)
and, where as regular readers know, to catch up to the labour productivity levels of the leading OECD bunch (US and various countries in northern Europe), we’d need something like a 60 per cent increase in productivity.
It is simply unserious.
Things were no better on the fiscal side. Here, for today, I’m largely just going to rerun the notes I wrote for the Taxpayers’ Union and which are already in their newsletter
“This year’s Budget represents another lost opportunity, and probably the last one before next year’s election when there might have been a chance for some serious fiscal consolidation. The government should have been focused on securing progress back towards a balanced budget. Instead, the focus seems to have been on doing just as much spending as they could get away with without markedly further worsening our decade of government deficits.
“OBEGAL – the traditional measure of the operating deficit, and the one preferred by The Treasury – is a bit further away from balance by the end of the forecast period (28/29) than it was the last time we saw numbers in the HYEFU. There will be at least a decade of operating deficits, and even the reduction in the projected deficits over the next few years relies on little more than “lines on a graph” – statements about how small future operating allowances will be – that are quite at odds with this government’s record on overall total spending. Core Crown spending as a share of GDP is projected to be 32.9 per cent of GDP in 25/26, up from 32.7 per cent in 24/25 (and compared with the 31.8 per cent in the last full year Grant Robertson was responsible for). The government has proved quite effective in finding savings in places, but all and more of those savings have been used to fund other initiatives. Neither total spending nor deficits (as a share of GDP) are coming down.
“Fiscal deficits fluctuate with the state of the economic cycle, and one-offs can muddy the waters too. However, Treasury produces regular estimates of what economists call the structural deficit – the bit that won’t go away by itself. For 25/26, Treasury estimates that this structural deficit will be around 2.6 per cent of GDP, worse than the deficit of 1.9 per cent in 24/25 (and also worse than the last full year Grant Robertson was responsible for). There is no evidence at all that deficits are being closed, and the ageing population pressures get closer by the year.
“Some things aren’t under the government’s direct control. The BEFU documents today highlight the extent to which Treasury has revised down again forecasts of the ratio of tax to GDP (which reflects very poorly on Treasury who rashly assumed that far too much of the temporary Covid boost would prove to be permanent). But, on the other hand, the forecasts published today also assume a materially high terms of trade (export prices relative to import prices), which provides a windfall lift in tax revenue. Forecast fluctuations will happen, but the overall stance of fiscal policy is simply a series of government choices. Unfortunate ones on this occasion.
“A few weeks ago the IMF produced its latest set of fiscal forecasts. I highlighted then that on their numbers New Zealand had one the very largest structural fiscal deficits of any advanced economy (and that we were worse on that ranking than we’d been just 18 months ago when the IMF did the numbers just before our election). The IMF methodology will be a bit different from Treasury’s but there is nothing in this Budget suggesting New Zealand’s relative position will have improved. We used to have some of the best fiscal numbers anywhere in the advanced world, but as things have been going – under both governments – in the last few years we are on the sort of path that will, before long, turn us into a fairly highly indebted advanced economy, one unusually vulnerable to things like expensive natural disasters.”
With just a few elaborations/illustrations
First, here is the chart of tax/GDP
Even allowing for fiscal drag, quite how Treasury thought so much of the lift in tax/GDP was going to be more or less permanent is lost on me. They don’t really say.
Second, here is Treasury’s estimate of the structural (OBEGAL) balance as a per cent of GDP, showing recent years, and the forthcoming (25/26) financial year on the Budget announced today
The government seems to have become quite adept at rearranging the deckchairs (cutting spending that they consider low priority and increasing other spending) but they are choosing to make no progress at all in reducing the structural deficit. There were big savings found in this Budget, but none were applied to deficit reduction. Sure, the forward forecasts showing the structural deficit shrinking – never closing, even by 28/29 – but that is based on wishful “lines on a graph”, suggesting that the government intends to cut core crown expenses by a full 2 percentage points of GDP over the following three financial years, when on today’s forecasts expenditure as a share of GDP in 25/26 (32.9 per cent), will be a bit higher than in 24/25, and very slightly lower than in 23/24. The Ardern/Robertson government got by on 31.8 per cent in 22/23.
Finally, a reminder from Monday’s post
Depending on your measure we were (based on HYEFU/BPS numbers) worst or close to worst in the advanced world. Today’s Budget will have done nothing to improve that ranking. It should have.
The Budget is a lost opportunity, both on the fiscal and the productivity front. A couple of journalists at the lock-up asked for a summary label for the Budget. Some people had snappier versions, but mine was simply the “Deeply underwhelming Budget”.
Take a scenario, just as a thought experiment for now.
A new government gets elected, amid a lot of rhetoric about excessive increases in government spending and public service numbers. They pretty quickly move to require government departments – typically funded by Parliament through annual appropriations – to cut their spending. Typically these agencies were being expected to make cuts of 6.5 per cent or 7.5 per cent.
You are part of the governance structure – Board member, CEO, perhaps other top tier managers – of a powerful public agency, one that doesn’t really do “frontline services” types of stuff, but also one that isn’t directly funded by Parliament. Instead, by law every few years your agency agrees with the Minister of Finance how much you can spend for each of the following few years. When the government changes there is still a little more than 18 months to run on your latest agreement – itself in fact a variation agreement made just a few months earlier, just before the election, that had substantially increased how much your agency could spend over the remainder of the agreement period.
How would you react in such a situation? (How do you like to think you would have reacted?)
One other big agency in New Zealand, not directly funded by Parliament either and not directly subject to the new government’s savings target, early on decided that they really needed to move with the spirit of the new environment. They (Board and CE presumably) adopted a 6.5 per cent cut themselves, telling the media that while they weren’t within the formal government plans “there’s a very clear expectation that we’ll make material cost saving”.
It is the sort of way I hope I’d have behaved had I been in their shoes.
Of course, there is another approach. After all, under the law governing this agency, they get to set their own annual budget. Remember that there is an agreement with the Minister, but actually there is nothing in law that forces them to actually spend in line with that agreement, and no direct consequences if they fail to do so.
So, another possibility, knowing that your agreement has 18 months or so to run, is simply to ramp up your organisation’s budget for the final year of that old agreement – perhaps to levels well above what is approved in the agreement – and then when it comes time to negotiate with the Minister of Finance on spending levels for the following five years, you simply offer up a 7.5 per cent saving from the hugely increased budget you yourself had set just a couple of months previously (all while shuffling a few more costs into the out-of-scope category to reduce even further the extent of the proposed “savings”).
And that, readers, is the story of what Adrian Orr, Neil Quigley, and the Reserve Bank’s Board did. It was simply extraordinary. Quite shameless really. Longstanding readers will know I have not been a fan of the Orr/Quigley stewardship of the Bank but…..I wouldn’t have guessed, without seeing it in writing, that their approach would be quite so openly shameless.
I wrote about the Bank’s new Funding Agreement quite a bit last month. The final and most comprehensive post was here. There are still lots of unanswered questions, but in early May – just before I headed off to PNG – the Bank released on its website a redacted version of the initial bid they had put in to Treasury, as adviser to the Minister of Finance, in September 2024 (NB: Thanks to the RB comms person who got in touch to draw my attention to this document.) This was the bid for $1 billion or so ($981 million opex and $50 million capex, both over five years), for things that would be covered by the Funding Agreement (quite a lot wouldn’t). I only got back to reading it this week.
To recap, in September 2023 Grant Robertson had agreed to a (further) increase in the Bank’s Funding Agreement spending for the last two years of the 2020-2025 agreement. For the year to 30 June 2025, the amount of core operational spending Robertson had approved was $149.44 million. In that previous funding agreement there was also a separate line item for direct currency issue expenses and Robertson agreed that if they underspent that they could use the balance for general operating expenses. That gave them perhaps another $5 million.
So as the Bank’s Board and management approached the setting of the 2024/25 Budget those were the parameters they were supposed to be working within. But they also had information from the Minister of Finance about future intentions. On 3 April she had sent the Board her annual Letter of Expectation, which contained these points
In the general
And the specific
A responsible Board member would surely then have read the times and concluded that (a) they really needed to ensure that the 2024/25 Budget was, at worst, no higher than what Grant Robertson had allowed (bearing in mind that most agencies were getting those 6.5 to 7.5 per cuts even in 2024/25) and b) that any bids for the new 2025-30 Funding Agreement should be kept no higher (whether in real or nominal terms) than the 2024/25 approved level of spending. The focus was clearly intended to be reprioritisation, not further increases (in an organisation whose operating spending and staff numbers had already increased massively in recent years).
That is what a responsible Board member, looking to the public interest etc, would have done.
It wasn’t what the actual Board and senior management did. Instead, they adopted and published a budget for operating spending (captured by the Funding Agreement) of $191 million for 2024/25. Recall the spending that Grant Robertson – Mr Big Spender himself as Minister of Finance – had allowed the Bank for 24/25: $149.44m plus (on their budget) $5.5m from the underspend of their direct currency expenses allowance. The approved budget for 24/25, on items covered by the Funding Agreement, was 23 per cent in excess of what Robertson had allowed them, having already had those counsels of restraint from the Minister of Finance in her April letter. (As I noted in earlier post, there are mysteries around whether the Minister raised any objection at the time – she had to be consulted – which maybe an outstanding OIA will shed some light on, but that isn’t the focus of this post.)
That Budget was approved in June 2024 and in late August the Board approved the Funding Agreement bid (note that the current “temporary Governor” while not then a full Board member himself was in attendance throughout the relevant Board meeting). It was sent off to the acting Secretary to the Treasury, signed by both Orr and Quigley, on 13 September. And here from the second page of the covering letter (with a 40+ page document) was how their bid was sold, in blaring headline
In the body of the document it is repeated: “this approach would achieve savings of 7.5 per cent from our baseline operating expenditure, as requested by the Minister of Finance” [a footnote here refers the reader to the 3 April Letter of Expectation].
Ramp up the budget to 23 per cent above (previous Minister’s) authorised levels…..and then graciously offer a 7.5 per cent “cut” from that level. Really quite breathtaking… In fact in the previous paragraph they carefully noted that they had “had regard” to the Minister’s stance in her Letter of Expectation. Read, thought about, and then ignored would seem a more accurate description, all while attempting to spin Treasury and the Minister of Finance (nowhere in the document do they claim, for example, that the previous Funding Agreement levels were inadequate and needed to be increased. They simply take their own budget as the starting point, claim to have heeded the Minister, and end up “offering” a level of spending well above (in real and nominal terms) what even Grant Robertson had approved.
There is more sleight of hand when it comes to staff numbers. The government had seemed to be looking for agencies to be slimming staff numbers. In the year to June 2024 the Bank had increased staff numbers by 18 per cent (another 90 people), and in their Funding Agreement bid you get the sense that the “current headcount” was, in their view, roughly adequate for the things they had to do. And in fact later in the document they suggest that their preferred option would involve a net headcount reduction of 19 people. But what they didn’t point out to Treasury (or thus to the Minister) is that at the very same time they were handwaving about potential savings, they were going hell-for-leather to further increase staff numbers. We know this because the paper the Minister of Finance finally took to Cabinet in March tells us that the Bank increased staff numbers from the 601 at the end of June 2024 to 660 (FTE) by the end of January 2025. So they had no intention of actually cutting staff numbers, just of slightly slowing the rapid further increase they were already recruiting for. Now, sure, acute readers must have realised that such a huge operating budget increase in 2024/25 must have involved further increases in staff numbers, but….they were left to work it out for themselves. In a political and public spending climate in which Orr and Quigley and all the rest of them were only too well aware of sensitivities around rising staff numbers.
It is all pretty disreputable, shabby, and borderline dishonest (I didn’t spot an actual verifiable lie in the document; it was all in the self-serving misleading framing). Among the ongoing mysteries is why, when Treasury received this bid, they didn’t take a quick look and send it straight back with a demand that the Board revise the starting point back to (say) the previously approved (by Robertson) level of opex, not the Board’s own inflated budget which bore no relation to what the previous Minister of Finance had approved them spending. It wasn’t until March this year, after Orr’s departure, that there was finally a revised (much lower) submission.
And although the Orr/Quigley initial submission had strongly suggested that the Bank needed every one of the proposed billion dollars to function, reality seems to disagree. Just a couple of weeks ago the “temporary Governor” completed a restructuring of his top tier, in which the number of (very expensive) roles was reduced from about nine to four. Not hard to economise when you try (when the Minister’s choices finally compelled it). The Governor has gone of course (he’ll eventually be replaced), as have Assistant Governors Smith (finance), Kolich (data), Robbers (strategy, governance, and sustainability), Strategic Adviser Prince, and the grapevine reports that another of the Orr hires, Assistant Governor Owen (risk and legal) has also resigned. It is really only a start, since Board chair Neil Quigley and all the board members who approved and endorsed this egregious funding bid are still there (although the terms of two expire next month). And are we really to believe that all along the Deputy Governor, Hawkesby, hadn’t been endorsing the approach?
And then, of course, there is the lack of transparency. In that Funding Agreement bid they explicitly told Treasury that once a new agreement was reached “our intent is to publish the final version of our Funding Proposal on our website”. Which sounds quite good, but…. the new Funding Agreement was published on 16 April. It is now 20 May, and although they have published a redacted version of the first proposal (which is a start) there is no sign of the final revised March bid. In fact, I have an OIA request in for it
Just yesterday I heard back from the Bank
Of these:
the first relates to the question of whether the Minister ever pushed back on the proposed 24/25 budget
the second covers two specific and easily identified documents (the first now released – see above), and
the third is to shed light on whether the Board pushed back at all on what management was proposing (is the final version different in any material extent to what went to Treasury.
None of these documents will take any particular effort to find, and at least one they promised Treasury nine months ago they’d publish. But…..in the way of public sector obstructionism, they’ve just taken another six weeks to respond to a fairly straightforward request. Isn’t that convenient for them.
It really is staggering that a government-appointed Board chair could try it on quite as egregiously as Quigley did (in league with Orr) and still hold his very well-paid role ($200000 for a part-time role), including leading the process of selecting a nominee to be the next Governor.
Not that long ago, New Zealand’s fiscal balances looked pretty good by advanced country standards. Sure, the fiscal pressures from longer life expectancies were beginning to build – as they were in most of the advanced world – but in absolute and relative terms New Zealand still looked in pretty good shape.
Just a few months before Covid, in October 2019, the IMF published its half-yearly Fiscal Monitor, with the helpful cross-country comparative tables (whatever the merits of New Zealand’s own approach to measuring and reporting fiscal balances it doesn’t facilitate international comparisons).
This was how we’d compared with the median advanced country that year and the previous few.
Notes for this and several later charts:
“general government” (not central), the only meaningful basis for international comparisons
“primary” = ex interest (so reflecting current spending choices not legacy debt)
“cyclically-adjusted”, so looking through the state of the economic cycle. For Norway the data are not cyclically-adjusted (IMF only publishes cyclically-adjusted numbers for ex-oil Norway)
“advanced countries” = IMF classification for sovereign states (so ex Hong Kong), with Poland and Hungary added.
So under both National and Labour-led governments we were mostly running structural primary surpluses, and surpluses a bit larger than the median advanced country. Since our starting level of net public debt was lower than that of the median OECD country, using cyclically-adjusted overall balances our relative position was a bit stronger still.
Covid, of course, intervened, and in 2020 and 2021 most countries (including New Zealand) had really big fiscal outlays associated with supporting the Covid disruption to economic activity.
So fast forward to 2023. The Covid spending itself was by then a thing of the past.
The IMF released another Fiscal Monitor set of forecasts/estimates in October 2023 just a few days before our election (I wrote about the numbers here at the time). I’ve averaged the numbers for 2023 and 2024, but choosing either year individually wouldn’t make much difference. We now had among the larger structural primary deficits of any advanced country (again, the picture was a little less bad using the cyclically-adjusted total balance).
So that, as estimated by the IMF (who use national numbers for each country but do their own cyclical adjustment), was pretty much the situation the incoming government inherited at the end of 2023. They knew that New Zealand was estimated to have among the largest primary structural deficits advanced world – a choice (and it was pure choice) made by the outgoing government.
So what stance was taken by the incoming government in its first Budget this time last year? This chart is from the Budget Economic and Fiscal Update. Treasury’s own estimate of the structural deficit was that policy choices would widen the structural deficit for 24/25 slightly relative to the estimate for 23/24.
That wasn’t particularly surprising. There were expenditure cuts (and a tax increase) but there were also a number of tax cuts (much as had been promised by National in the election campaign).
Treasury estimates of the adjustments required to get to structural and cyclically-adjusted balance estimates can change with incoming data, but this chart was from last December’s HYEFU
There was still no sign of any improvement in the structural position, based on decisions already made (ie last year’s actual Budget as distinct from lines on a graph about possible future Budgets).
Which brings us to the most recent IMF Fiscal Monitor released a few weeks ago. This is how our cyclically-adjusted primary deficit now compares (for NZ, the IMF uses HYEFU/BPS information – they don’t impose their own guesses about fiscal policy itself): largest structural primary deficit among the advanced countries (and a far cry from the modest structural primary surpluses New Zealand governments ran – chose to run – last decade)
and here is the chart for the structural overall balance (ie including finance costs)
Not quite as bad, but still 4th largest deficits among advanced countries.
As I’ve shown previously, the net debt position is not yet particularly bad. Government debt as a share of GDP is still below that of the median advanced country, but that gap has been closing rapidly.
And one could add to the mix the repeated extension – by both governments – of the horizon for getting back to operating balance (currently, on the standard OBEGAL definition, both National and Labour seem agreed that 2029 is fine, at least until some other shock or pressure comes along).
It isn’t as if the financial markets are going to compel adjustment. If the net debt rises materially further a credit rating downgrade can’t be ruled out, but on its own that wouldn’t matter very much. It is more a question of our own choices and our own sense of fiscal responsibility and accountability.
Of course, there will be plenty of people – perhaps currently mostly on the political left – inclined to the view that if anything our governments should take on more debt. I’d largely agree with them that a somewhat higher level of debt is not likely to either raise interest rates very much or dampen potential GDP growth very much. My aversion to higher public debt is more about the demonstrated weakness of the political process in too many countries – not so much in New Zealand for a couple of decades, but again apparently now. It is easy to promise nice-to-haves (and both main parties have been guilty of this in recent years) when you don’t have to go to the voters and ask them for higher taxes now to pay for the handouts. Much more honest that if you want to increase (structural) spending – new or more expensive programmes – to raise taxes to pay for it. Failing to do that risks taking our country the way of places like France, the UK or the US – even before the demographic pressures really up the ante.
What will we see in the Budget? We’ll see I guess, but the Minister of Finance has announced a cut in the operating allowance for 24/25. That is no doubt fine and good, but relative to the scale of the structural imbalances – see charts above – it is pretty small beer, enough only to improve our ranking in those IMF charts by one place. Perhaps the Treasury’s estimation of cyclically-adjustment will have changed – for better or for worse – but we seem a long way from where we should be. And having chosen not to adjust last year, and with the three-party coalition chasing re-election next year, this year’s Budget was perhaps the only real hope left this term for getting back on fiscal track. To be sure, economic activity at present appears pretty weak, but a well-signalled tougher fiscal adjustment would normally be expected to be met by a looser-than-otherwise monetary policy (rather than further weakening economic activity). That, it seems, is not to be.
(The Opposition, of course, seems to differ only on the mix, not the extent of the fiscal imbalance they created and bequeathed, or the speed – sluggish at very best – with which it should be dealt with.)
But no doubt we will all be looking forward to the “bold” steps to lift economic growth etc
I saw this morning this chart in a tweet from a Canadian economics professor (prompted by the new ministerial appointments in Canada).
I was digging around in the list of former New Zealand Ministers of Finance anyway, and thought it might be interesting to try a New Zealand version. Responsible government here goes back to 1856 and so I dug out the previous occupations of those who have held the office of Minister of Finance (or Colonial Treasurer or Treasurer) since then. The list has 42 names (although several held the office on several separate occasions – Ward being the most recent to have been Minister of Finance four separate times, the last ending in 1930). Canada, reading from the chart above, appears to have had 43 federal Ministers of Finance since 1867.
Of our 43, 7 held office for less than six months (some of those early governments lasted for days or mere weeks). I could have excluded them from the chart below, but it doesn’t look as though doing so would materially alter the picture (although it would mean dropping our one engineer – Charles Brown (1856) – and the one builder (William Hall-Jones (1906)).
When you sometimes hear breathless cries of how awful it was that Muldoon served as his own Minister of Finance while being Prime Minister you realise how little New Zealand history people know. In addition to Muldoon, the following served as Minister of Finance and Prime Minister at the same time (some on more than one occasion): Stafford, Vogel, Atkinson, Grey, Ballance, Seddon, Hall-Jones, Ward, Massey, Forbes, and Holland. You’d have to guess it won’t happen again, but it simply hadn’t been uncommon in New Zealand (and that in the days before legions of Associate Ministers).
So, to the chart. In most cases it is pretty clear how to classify people (Tizard was a teacher, Muldoon and Douglas were accountants, Richardson was a lawyer), but not always. I’ve shown both Grant Robertson and Nicola Willis as political staffers, but Robertson had also been a public servant and Willis a lobbyist.
The chart is very different from the Canadian version. Farmers still top the chart, although the last farmer to have been Minister of Finance was Gordon Coates who left office in 1935 (yes, I know Bill English has some claims but by the look of it he spent about a year on the family farm before going into politics).
As for the “business” category it is also a little arbitrary: Seddon (publican), Birch (surveyor) and the architect and builder each had their own firms – as in fact for a time had Walter Nash, although I’ve classified him as a political administrator in respect of his long service as secretary of the Labour Party. And in case you are wondering about the civil servants, that list is Bill English and a number of colonial administrators, including one of the eminence of George Grey.
Unlike Canada, no economists have held the office. I have no reason to think that a bad thing – I’m wary of, for example, doctors as Minister of Health – although no doubt Don Brash once aspired to it, and perhaps Dan Bidois (Parliament’s one current economist) does now? And it is worth bearing in mind that once upon a time incomes per head here were well above those in Canada, and now they lag behind (and Canada itself has a pretty woeful productivity record).
[UPDATE: Since I have been contacted on this point by a few people, I should note that I am aware that Brooke Van Velden has a degree majoring in economics. However, at least as I understand it, she has never worked as an economist – which is not a criticism of course – and on leaving university worked for the political PR firm Exceltium. Bidois, on the other hand, worked as an economist at OECD for several years.]
Anyway, I’m a history and politics junkie and I found it interesting. I hope some of you did. For the real nerds here is the full table
A couple of months ago now I wrote a post about the new set of discount rates government agencies are supposed to use in undertaking cost-benefit analysis, whether for new spending projects or for regulatory initiatives. The new, radically altered, framework had come into effect from 1 October last year, but with no publicity (except to the public sector agencies required to use them). The new framework, with much lower discount rates for most core public sector things, wasn’t exactly hidden but it wasn’t advertised either.
My earlier post (probably best read together with this one) was based largely around a public seminar Treasury did finally host in February, the advert for which had belatedly alerted me to this substantial change of policy approach (and sent me off to various background documents on The Treasury website).
As a quick reminder, discount rates matter (typically a lot), as they convert future costs and benefits back into equivalent today’s dollars (present values). The discount rate used makes a big difference: for a benefit in 30 years time discounting at 2 per cent per annum reduces the value by almost half, while converted at 8 per cent the present value of that benefit is reduced by almost 90 per cent.
Until last October, projects and initiatives were to be evaluated at a 5 per cent real discount rate – rather lower than the rates historically used in New Zealand, but not inconsistent with the record low real interest rates experienced around the turn of the decade (recall that the discount rates did not attempt to mimic a bond rate, but took account of the cost of both debt and equity).
The new framework, summarised in a single table, is
and in case there was any ambiguity about where the focus now lay, not only was the non-commercial proposals line listed first but the circular itself made it clear that the non-commercial rate(s) were likely to be the norm for most public service and Crown entity proposals.
In the earlier post I outlined a bunch of concerns about this new approach, both around the substance and what it might mean for future spending (and, for that matter, regulatory) pressures, and around what appeared to have been quite an extraordinary process, with no public consultation at all. Treasury officials at the seminar had, however, assured me that it had all been approved by the Minister of Finance, which frankly seemed a little odd given the (then) new government’s rhetorical focus on rigorous evaluation of spending proposals etc.
Anyway, I went home and lodged an Official Information Act request with The Treasury. They handled it fairly expeditiously but it took me a while to get round to working my way through the 100+ pages they provided. This was the release they made to me
and this was their advice to the Minister of Finance, already released but buried very deep in a big general release on a range of topics. I’ve saved it here as a separate document.
None of the released material allayed any of my concerns. In fact, those concerns are now amplified, and added to them is a concern about the really poor quality, and loaded nature, of the narrow advice provided to the Minister of Finance on what can be really quite a technical issue but with much wider potential political economy implications. There was an end to be achieved – officials were keen on lower discount rates – and never mind a careful. balanced, and comprehensive perspective. It was perhaps summed up in the comment from one principal adviser who noted “I get a bit lost on the technical back and forth on SOC vs SRTP” but “I support moving to 2%”.
Somewhat amazingly, even though all the documents talk about how a change of this sort really should have ministerial approval – this is even documented in the minutes of The Treasury’s Executive Leadership Team meeting of 12 March 2024 – in the end all they did was ask the Minister to note the change they (officials) were making. All the Minister was asked to agree to was process stuff around the start date and future reviews. I’m surprised that there seems to have been no one in her office – her non-Treasury advisers, who in part are supposed to protect busy and non-technical ministers from officials with an agenda – who appears to have appreciated the significance of what was going on or thus to have triggered a request for more and better analysis/advice. Or even, it appears, to have raised questions about what was behind the comment in the Consultation section of the paper that “To manage risks of raising external expectations and a risk of prolonged debate, we have not consulted publicly”. Were there perhaps alternative perspectives then that the Minister should have been made aware of? (The only people consulted were other public sector chief economists – whose agencies will typically be keen on getting project evaluation thresholds lowered – and a few handpicked consultants.)
What became more apparent in the papers was that this entire project had got going under the previous government (Labour, but with Greens ministers) when the Parliamentary Commissioner for the Environment had suggested in 2021 that public discount rates should be reviewed with a view to adopting a model that would discount future benefits (relative to upfront costs) less heavily. Treasury had undertaken in 2022 to the (then Labour majority) select committee that they’d do a review. Things seemed to get their own momentum from there, and nothing about either a change in fiscal circumstances – back in 2021/22 even Treasury was keen on spraying public money around – nor a change in government seems to have prompted a pause. Had the new Minister of Finance, or her office, been more alert to the implications, perhaps they’d have called a halt to the work programme (but on this occasion I’m reluctant to put much blame on the Minister, as she appears to have been so badly advised by The Treasury).
The only advice the Minister of Finance appears to have been provided with is the short paper linked to above. It has just over two pages of substance (the rest is process, plus a four page technical appendix – which I’d imagine that, for a noting recommendation only, a busy – and non-technical – minister would not normally read).
It is striking what the Minister is never told:
there is no mention in the paper that the practical implication of the new approach Treasury was planning to take was that most public sector projects and proposals would be evaluated primary at a 2 per cent real discount rate rather than the (standard) 5 per cent rate previously. They mention that the SOC-based rate is being increased, in line with the increase in bond rates, but never that this discount rate will no longer be used much.
there is no attempt in the paper to the Minister to explain, or justify, the new approach under which discount rates for years beyond year 30 would be evaluated at even lower discount rates still (there are arguments for and against, but none of it is mentioned and nor are the implications drawn to the Minister’s attention).
they note the distinction that one rate will be used for commercial projects and one for non-commercial things, but offer no analysis or advice on either why such a distinction should be introduced or how, either conceptually or practically, the two would be distinguished (they promise they would develop future guidance, but this still appears not to have been done).
they never draw the Minister’s attention to the fact that one can evaluate projects at any rate one chooses but that it does not change the fact that there is a real cost – in debt and equity finance – which isn’t a million miles away from the Social Opportunity Cost (SOC) approach they were planning to move away from. Projects that passed a cost-benefit test at a 2% (or 1%) discount rate but failed to do so using an 8 per cent rate would, if approved, simply be being subsidised by taxpayers.
they never drew to the Minister’s attention that they were planning to leave the rate of capital charge at 5 per cent, now inconsistent with either approach to discounting and project evaluation
There is also no engagement with some of the conceptual issues raised by what Treasury was planning. This is from my previous post
It is all very well for Treasury to say that every proposal will have to have numbers presented with both a 2% and 8% discount rate, but if they cannot answer simple questions like these (or alert the Minister to them) then all they’ve done is introduced a pro-more-spending muddled model.
Perhaps most breathtaking was the bold claim (offered with no supporting analysis at all) that “The updated discount rates will not change the dollar volume of spending, since individual spending proposals will continue to be prioritised within a budget constraint (fiscal allowances).”
It is the sort of claim that if a first year analyst had made you might take them aside and explain something about incentives, political economy, and what was and wasn’t fixed in the system. This paper was written and signed out by a highly experienced Principal Adviser and a highly experienced Manager, and the policy had been signed off by the entire Executive Leadership group.
Never once it is pointed out to the Minister that budget allowances (whether capital or operating) are hardly immoveable stakes in the ground, enduring come hell or high water from decade to decade. (Why, this very morning, the operating allowance for this year was altered again). Or that the overall effect of what Treasury was planning to do would mean that more projects (spending proposals) and more regulatory initiatives would pass a cost-benefit test and show a positive net present value. And that while, in any particular year, an operating allowance might bind (so that only – at least in principle – the most highly ranked projects (in NPV terms) would get approved, over time if more projects and regulatory proposals showed up with positive NPVs the pressure would be likely to mount – whether from public sector agencies or outside lobby groups – for more spending and more regulation. (In fact, Treasury never even pointed out the operating allowance is a net new initiatives figure and higher taxes can allow higher spending even within that self-imposed temporary constraint.) And that even if a National Party minister might pride herself on her government’s supposed ability to restrain spending, time will pass, governments will change, and future governments that are predisposed to spend more will hold office. Sharply lowering discount rates – to miles below the actual cost of capital – was just an invitation to such governments. It seems like fiscal political economy 101…..and yet not only is this issue not touched on in the advice to the Minister there is no sign of it in any of the other documents Treasury released to me. You wouldn’t get the sense at all either that the fiscal starting point was one in which New Zealand now had one of the largest structural deficits in the advanced world, with even a projected return to surplus years away.
Treasury seems to have just wanted lower discount rates.
You get this sense in this extract from that short paper to the Minister
Goodness, we wouldn’t want anyone debating the appropriate discount rate would we, so let’s just render it moot by moving to an extremely low rate (in a country with a historically high – by international standards – cost of capital). Or, we don’t anyone fudging their cost-benefit analysis – but isn’t Treasury supposed to be some of gatekeeper and guardian of standards – so we’ll just make it easy and slash the discount rate hugely. And as for that claim that a 5 per cent discount rate – miles below any credible estimate of cost of capital or private sector required hurdle rate of return – incentivises decisionmakers to focus on the short-term, there is no serious (or unserious) analysis presented to the Minister suggesting this was in fact so (that lots of projects with compelling cases were missing out), nor any attempt to suggest that capital is in fact costly, and that when it is costly there should be a high hurdle generally before spending money that has payoffs only far into the future.
There is, you should note, no corresponding paragraph outlining the incentive effects and risks around what Treasury was planning to do.
There was a time when you could count on The Treasury for really good and serious policy advice. If this paper is anything to go by, that day is long past. Changes of this magnitude should have been done only with the Minister’s explicit approval and should probably only have been done after serious and open public consultation. And the Minister was entitled to expect much better, and less loaded, advice than she received on this issue, where what Treasury was planning ran directly counter to the overall direction of the government fiscal policy and spending rhetoric. The Minister herself probably should have had better and more demanding advisers in her office, but really the prime responsibility here for a bad, muddled and ill-justified change of policy rests with The Treasury.
(And in case you think I’m a lone voice in having concerns, here is a column from a former very experienced Treasury official who had considerable experience in these and related issues)
[Further UPDATE 21/5. Consultant and former VUW academic Martin Lally has added his concerns on the substantive issues in two posts here
croaking cassandra 