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class="site-branding"> <a href="https://croakingcassandra.com/" class="site-logo-link" rel="home" itemprop="url"></a> <h1 class="site-title"><a href="https://croakingcassandra.com/" rel="home">croaking cassandra</a></h1> <h2 class="site-description">Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective</h2> </div> <nav id="site-navigation" class="main-navigation nav-horizontal" role="navigation"> <button class="menu-toggle" aria-controls="primary-menu" aria-expanded="false">Menu</button> <div id="primary-menu" class="menu"><ul> <li class="current_page_item"><a href="https://croakingcassandra.com/">Home</a></li><li class="page_item page-item-1"><a href="https://croakingcassandra.com/about/">About Michael Reddell’s blog</a></li> <li class="page_item page-item-66509"><a href="https://croakingcassandra.com/book-reviews/">Book reviews</a></li> <li class="page_item page-item-58338"><a href="https://croakingcassandra.com/china-prc/">China (PRC)</a></li> <li class="page_item page-item-71258"><a href="https://croakingcassandra.com/early-mpss-and-economic-projections/">MPSs & Economic Forecasts from early-mid 90s</a></li> <li class="page_item page-item-8395"><a href="https://croakingcassandra.com/papers-and-speeches/">Papers and speeches</a></li> <li class="page_item page-item-70350"><a href="https://croakingcassandra.com/reserve-bank-of-new-zealand-superannuation-scheme/">Reserve Bank of New Zealand Superannuation Scheme</a></li> </ul></div> </nav> </header> <div id="content" class="site-content clearfix"> <div class="primary content-area"> <main id="main" class="site-main" role="main"> <div class="article-wrapper"> <article id="post-72454" class="post-72454 post type-post status-publish format-standard hentry category-new-zealand-economic-performance category-productivity"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/" rel="bookmark">Going for growth…..perhaps</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/" rel="bookmark"><time class="entry-date published" datetime="2025-02-03T11:16:17+13:00">February 3, 2025</time><time class="updated" datetime="2025-02-03T11:25:24+13:00">February 3, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/new-zealand-economic-performance/" rel="category tag">New Zealand economic performance</a>, <a href="https://croakingcassandra.com/category/productivity/" rel="category tag">Productivity</a></span> </div> </header> <div class="entry-content"> <p>The <a href="https://www.beehive.govt.nz/speech/state-nation-2025">Prime Minister’s speech</a> 10 days or so ago kicked off a flurry of commentary. No one much anywhere near the mainstream (ie excluding Greens supporters) questioned the rhetoric. New Zealand has done woefully poorly on productivity for a long time and we really need better outcomes, and the sorts of policy frameworks that would supports firms and markets delivering better material living standards for New Zealanders.</p> <p>The Prime Minister asserted that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”. Assuming that these are shorthands for measures intended to durably and substantially lift economywide productivity growth (I saw a nice quote the other day from the Canadian Leader of the Opposition to the effect that no one talks about productivity <em>per se</em> except economists and friends of economists), one could only respond “good if true”.</p> <p>We have been promised a “rolling maul” of new policy measures as the year unfolds. And the Minister of Finance (now rejoicing in the rather absurdly named additional title of Minister for Economic Growth -albeit perhaps no more absurd that the Economic Development title it replaced) went further in her <a href="https://www.beehive.govt.nz/release/budget-will-be-delivered-22-may">press release</a> announcing the Budget date and promising</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image.png"><img data-attachment-id="72459" data-permalink="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/image-324/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image.png" data-orig-size="1138,269" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image.png?w=700" width="1024" height="242" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image.png?w=1024" alt="" class="wp-image-72459" /></a></figure> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-1.png"><img data-attachment-id="72461" data-permalink="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/image-325/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-1.png" data-orig-size="1098,102" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-1.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-1.png?w=700" width="1024" height="95" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-1.png?w=1024" alt="" class="wp-image-72461" /></a></figure> <p>It is a distinctly different emphasis than in her Budget-date announcement press release last year.</p> <p>Nothing like building up expectations….and one hopes journalists will keep an eye on this set of promises.</p> <p>I’d give this government credit for a number of steps that, at the margin, may help boost growth, productivity, and efficiency of the New Zealand economy. But it is hardly a case of everything working in the same direction: last year, for example, we had increased business tax rates (re building depreciation), increased taxes on inbound tourists, more restrictions of bank mortgage lending, passing up chances to overhaul key personnel at the Reserve Bank, and of course a Budget that, taken together, slightly widened the structural fiscal deficit. And it wasn’t as if the growth rhetoric wasn’t around last year (eg this quite respectable, as far as these things go, <a href="https://www.beehive.govt.nz/speech/speech-auckland-business-chamber-growth-answer">speech</a> from March 2024).</p> <p>Perhaps this time they really will deliver “bold steps” in May. I’m open to being convinced – and in this case would love to be wrong- but count me sceptical.</p> <p>For various reasons:</p> <ul> <li>For all the rhetoric from the PM and Minister of Finance there is no specific goal which they are willing to use as a stake in the ground (even John Key for a short time would run the line that “our vision is to close the gap with Australian by 2025”),</li> <li>There was nothing in the National Party’s campaign material in 2023 that suggested either a deep understanding of the issues or a policy agenda equal to the sort of challenge New Zealand faces (and that was so even when there were some specifics I thought made sense),</li> <li>We are now 14-15 months into the government’s term – the election is next year – and not much has been done so far, no compelling narrative has been developed, no key government agencies have been overhauled and made fit for the challenge etc,</li> <li>Where are the advisers? It isn’t obvious that there are first-rate productivity-focused political advisers in ministers’ (or the PM’s) offices, and what about MBIE and Treasury? MBIE is a bureaucratic behemoth run by a former Air New Zealand HR senior manager (no, before Luxon’s time) and in appointing a new Secretary to the Treasury, and despite more fine words from Willis last year, the government ended settling for a recycled former Deputy Secretary, who is certainly skilled at managing upwards but would never have been mistaken for a bold and innovative policy reformer (or leader of such people/processes). Oh, and the Ministry for Regulation is headed by a non-policy recycled public sector chief executive, who didn’t seem to be particularly well-regarded in her previous chief executive role.</li> <li>The Budget is now a mere 3.5 months away. Based on standard timings Treasury will be finishing their economic forecasts by the end of next month and the Budget is unlikely to incorporate anything not decided by the end of April. Without excusing bureaucratic sludge, good policy processes take time, perhaps especially in a coalition government.</li> <li>And, of course, none of the three measures announced in the last 10 days look to add up to very much (Invest NZ – one wonders why this spin-out from NZTE is needed at all, and what private sector advisers can’t provide – the re-organisation of the CRIs, and the digital nomad visa)</li> </ul> <p>There is, of course, some stuff in train that should in time prove helpful (for example, the RMA overhaul, although with the best of intentions it is likely to be years until we can be confident just how helpful – the original RMA having been understood at the time as a liberalising reform).</p> <p>One can only assume that the word has gone out from the offices of Luxon and Willis to all ministers, and then all public service agencies, to pull together whatever they now can – and perhaps hold off on other announcements for a while – to enable a set of Budget announcements that can be dressed up as passably resembling “bold steps”. No doubt there is stuff in the works – there almost always is – so perhaps the net effect will even be positive (though with enough confidence to lift Treasury’s assumptions about real per capita potential GDP growth?) but I wouldn’t be holding my breath that it will be the real thing, or even begin to get to grips with the magnitude of the challenge. But – Trump ructions permitting – quite probably there will be some cyclical rebound in GDP growth in time for next October (for which the government will deserve no more credit than it deserves blame for the monetary policy induced recession last year),</p> <p>On that note, the Sunday Star-Times yesterday ran an <a href="https://www.thepost.co.nz/politics/360564492/we-set-out-close-gap-australia-2025-and-weve-failed">op-ed</a> from Don Brash and me, prompted by some combination of memories of that goal of catching Australia by 2025 (Don chaired the taskforce and I provided analytical and drafting support) and the PM’s speech, trying not be to be particularly partisan (the failure – and the rhetoric, in varying volumes – has been common to all governments for decades). We ended the column this way.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/img_1876.jpeg"><img data-attachment-id="72463" data-permalink="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/img_1876/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/img_1876.jpeg" data-orig-size="2095,2467" data-comments-opened="1" data-image-meta="{"aperture":"1.8","credit":"","camera":"iPhone SE (3rd generation)","caption":"","created_timestamp":"1738580807","copyright":"","focal_length":"3.99","iso":"32","shutter_speed":"0.0082644628099174","title":"","orientation":"1","latitude":"-41.331269444444","longitude":"174.77752777778"}" data-image-title="IMG_1876" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/img_1876.jpeg?w=255" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/img_1876.jpeg?w=700" width="870" height="1024" src="https://croakingcassandra.com/wp-content/uploads/2025/02/img_1876.jpeg?w=870" alt="" class="wp-image-72463" /></a></figure> <p>For anyone interested, the full text follows:</p> <p>When Don was young and Michael’s parents were young, New Zealand had among the very highest material standards of living in the world.  It really was, in the old line, one of the very best places to bring up children.  But no longer.</p> <p>For 75 years now, with no more than brief interruptions, New Zealand has been losing ground relative to other countries.   Australia and the UK pulled ahead of us, previously poor places like Singapore and Taiwan caught up and overtook us, and increasingly now the former eastern bloc countries (Slovenia, Estonia, Poland, and so on) are catching and overtaking us. </p> <p>Don’t get us wrong: material living standards here are still well ahead of where they were in the 1950s, but if we were once a leader we are now a laggard.  All too many of our people have seen better opportunities across the Tasman for themselves and their kids and have made the move.  That’s good for them, of course, but a poor reflection on economic performance and policy back here.</p> <p>For 40 years, successive governments have talked a good game about reversing that relative decline and closing the gaps that were opening up.    In the earlier part of the period there were far-reaching policy reforms, which probably helped slow the rate of relative decline.  In more recent decades, the ratio of talk to action has very much favoured talk.  And that is so whichever of our main political parties has led the government.</p> <p>In late 2008, nearly 17 years ago now, as part of a post-election agreement with ACT, the then government led by John Key announced a goal of catching up with Australia by 2025.  A Taskforce was set up to advise the government on policy options that might enable aspiration to be turned into solid economic achievement.  Don chaired that 2025 Taskforce and Michael wrote much of the Taskforce’s first report.   </p> <p>The report wasn’t well-received by the then government –  in fact, the then Prime Minister openly dismissed it even before it was released publicly – but that didn’t alter the facts:  New Zealand was lagging far behind Australia (and Australia itself wasn’t, and isn’t, a stellar economic performer).</p> <p>It is now 2025 and over the intervening years –  under successive governments, led by both main parties – no progress at all has been made in closing the gaps to Australia.  If anything, and as measured by labour productivity (output per hour worked), the gaps have widened a bit further.  Recently the Australian government has made it easier, and more secure, for New Zealanders – any of us, skilled or unskilled, young or old –  to cross the Tasman.   It isn’t that Australia has done particularly well economically in recent years –  rather the contrary –  it is just that New Zealand hasn’t even managed to match their underperformance consistently.    Productivity growth – the only secure foundation for material prosperity – here dropped away further from about 2012.</p> <p>This month we’ve heard a lot from the Prime Minister about the importance of economic growth.   It is fine rhetoric and we entirely endorse his argument.   Material prosperity – whether it is private consumption or better and more public services – rests on restarting sustained economic growth, which in turn rests on accelerated sustained growth in productivity. </p> <p>This isn’t just about the ups and downs of the business cycle. Economic activity has been particularly weak in the last 12-18 months as the Reserve Bank has been getting on top of the inflation it inadvertently generated with too easy monetary policy during the Covid period. Now that inflation is falling and interest rates are dropping, we should expect a cyclical recovery.    But a near-term bounce isn’t anything like enough; what we need is, say, 20 years of 2-3 per cent per annum productivity growth.  Over the last decade, actual productivity growth has averaged not much more than 0.5 per cent per annum.</p> <p>The Prime Minister announced a couple of small reforms in his speech this week.  They may well be individually helpful, but small changes aren’t what will produce really big differences in outcomes. </p> <p>We’ll watch with interest the promised “rolling maul” of reforms but aren’t confident that this government, any more than its National and Labour predecessors this century, is likely to respond on the scale equal to the challenge.  </p> <p>Sadly, it isn’t obvious either that the government has a public service with the energy, intellectual ferment, and concrete ideas that a willing government could pick up and run with.   But some of the options that should be considered are pretty obvious:  economics literature suggests that most of the burden of heavy taxes on business is actually borne by labour (in the form of lower wages than otherwise), and yet New Zealand –  plagued by decades of low levels of business investment – has one of the highest company tax rates in the OECD, and takes a higher percentage of GDP in corporate income tax than almost any OECD country.   Foreign investment in New Zealand remains harder than it should be, and is taxed more heavily than it should be.</p> <p>We can choose to continue to drift, with just incremental reforms, as successive governments have done for 30 years even amid the fine talk.  But if we do, more and more New Zealanders are likely to conclude rationally that there are better opportunities abroad, and for those who stay aspirations to first world living standards and public services will increasingly become a pipe dream.  </p> <p>It is a multi-decade challenge under successive future governments, but as the old line has it the longest journey start with the first step.  We hope the Prime Minister’s bold rhetoric signals the beginning of a willingness to lay things on the line, to lead the debate on serious options, to spend political capital, for the serious prospect of a much better tomorrow for our children and grandchildren.</p> <p>ENDS</p> <p>NB: Since I saw a BusinessDesk column this morning claiming that 1950-type cross-country comparisons are unfair (much of continental Europe was still recovering from the war), it is worth pointing out that exactly the same could have been said of 1939. New Zealand had among the very highest material living standards among advanced economies throughout the first half of the 20th century.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/02/03/going-for-growth-perhaps/#comments">9 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72441" class="post-72441 post type-post status-publish format-standard hentry category-pandemic"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/01/30/reviewing-covid-experiences-and-policies/" rel="bookmark">Reviewing Covid experiences and policies</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/01/30/reviewing-covid-experiences-and-policies/" rel="bookmark"><time class="entry-date published" datetime="2025-01-30T12:29:11+13:00">January 30, 2025</time><time class="updated" datetime="2025-01-30T12:41:57+13:00">January 30, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/pandemic/" rel="category tag">pandemic</a></span> </div> </header> <div class="entry-content"> <p>I’ve spent the last week writing a fairly substantial review of a recent book (<a href="https://unsw.press/books/australias-pandemic-exceptionalism/">“Australia’s Pandemic Exceptionalism: How we crushed the curve but lost the race”</a>) by a couple of Australian academic economists on Australia’s pandemic policies and experiences. For all its limitations, there isn’t anything similar in New Zealand.</p> <p>What we do have is the Phase 1 report of the Covid Royal Commission which was released by the government at the end of November. You can find the full 700+ page report <a href="https://www.covid19lessons.royalcommission.nz/reports-lessons-learned/">here</a>. I haven’t read the full report but did read Chapter 6 on “Economic and social impacts and responses” (which starts on page 242 of the Report itself, or page 285 of the pdf). It was, frankly, a pretty disappointing read. If the overall Royal Commission report itself got surprisingly little coverage, I don’t think I’ve seen any mention at all (certainly no serious or sustained reporting or analysis) on the economic dimensions of that exceptional period.</p> <p>It is disappointing on a number of counts. First, and perhaps least important to me at this point, we were told (and the terms of reference make clear) that the focus on the Royal Commission was supposed to be on lessons learned with a view to being better equipped/prepared to handle future pandemics. But in the economics section of chapter 6 there is almost none of that, and the focus seems to be almost entirely on describing and evaluating policy responses and the impact of them. Which would be fine, except that the chapter is very much an establishment perspective, with little or no sign of any critical scrutiny before reaching the generally rather complacent conclusions.</p> <p>I went and had a look at the <a href="https://www.covid19lessons.royalcommission.nz/the-inquiry/record-of-inquiry-engagements/">list of engagements and people the Royal Commission had met with</a> had over the course of their inquiry. I was looking to see which economists, academic or otherwise, the Royal Commission might have met with. They had, of course, met with The Treasury and the Reserve Bank, they’d met with three [named] former Secretaries to the Treasury (another former Secretary to the Treasury was one of the commissioners), they note a meeting with one economist described as a “public policy expert” on aspects of the wage subsidy scheme. And other than that all we got was, in November 2023, a mention that they had met with “various [unnamed] independent economic commentators”. Which was more than a little surprising when, for example, leading New Zealand economist John Gibson had been producing work on related issues since early days of the pandemic (discussed first on this blog <a href="https://croakingcassandra.com/2020/04/16/coronavirus-economics-and-policy-from-the-mailbox/">here</a>), as had former academic Martin Lally. I worked my way through the 12 pages of end notes to Chapter 6, and not only was there no reference to anything by Gibson or Lally, but there was no reference to any commentary or critique etc by any outside economists, academic or otherwise (although there is a quote from a Bernard Hickey Substack). There is a one sentence reference to “considerable concern” they heard from “some expert stakeholders” about the LSAP, only to dismiss this on the grounds that “these policies are now well accepted by international organisations” and going on to channel the Reserve Bank’s own lines in its defence. Fiscal losses of “in the order of $11 billion” are noted. but there is no attempt to evaluate the strategy or to think about how support might better (and more cheaply) be provided in future. That isn’t scrutiny and evaluation; it is reporting.</p> <p>The chapter is weak right from the start, when the Commissioners simply assert (there is no supporting analysis) that “the strict public health measures introduced in March 2020, especially the border closure and national lockdowns, were <strong>essential </strong>[emphasis added] to protect the economy and society from the immediate and devastating effects of the pandemic had the virus been allowed to spread unchecked”. There is no analysis as to what extent of restrictions was required (it is a very all or nothing assertion), there is no reference to the fact that significant reductions in movement were occurring prior to any legal restrictions (or, for example, to the work of Goolsbee and Syverson from the US, using mobile phone data, and suggesting that almost 90 per cent of reductions in movement pre-dated legal restrictions). There is no suggestion of any cost-benefit approach at the margins (as there was no sign of it in the official advice, and we recall the trouble the Productivity Commission got into when they did one brief illustrative exercise), and no comparison looking at how the economic costs and benefits of the New Zealand approach stacked up. Of course, no country let the virus “spread unchecked” but the US is often used as a foil and counterpoint to New Zealand and Australia, and for all the differences in approach it is striking how similar the respective paths of real GDP per capita proved to be (for quite different health outcomes of course).</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/01/image-4.png"><img data-attachment-id="72446" data-permalink="https://croakingcassandra.com/2025/01/30/reviewing-covid-experiences-and-policies/image-323/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-4.png" data-orig-size="666,498" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-4.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-4.png?w=666" loading="lazy" width="666" height="498" src="https://croakingcassandra.com/wp-content/uploads/2025/01/image-4.png?w=666" alt="" class="wp-image-72446" /></a></figure> <p>I don’t have a strong view on what, if anything, in this area should have been done differently, but we should have expected more challenge and scrutiny from the Royal Commissioners.</p> <p>There is no attempt anywhere in the chapter to consider whether the things fiscal policy was used for could have been done (materially) more cheaply – either in evaluating 2020 and 2021 or thinking about the future. The fiscal costs were staggeringly high. It also isn’t clear that the Royal Commission really understands the point of the initial fiscal approach. They talk about the aim being to support economic activity, when in fact it was quite the contrary: the point of the lockdowns (and private risk-averse behaviour) was to largely shut down the economy for a time. What the wage subsidy approach was designed to do was (a) tide individuals over (the government compelling many not to work, and b) facilitate a quicker rebound than otherwise by maintaining established firm-specific arrangements and human capital. It certainly did the former, but to what extent it really did the latter (see chart above) deserves more serious scrutiny. Headline unemployment rates in the US went far higher than in New Zealand (and Australia) reflecting different intervention approaches, but (see chart) it isn’t immediately obvious that overall US economic performance suffered.</p> <p>The Royal Commission also runs a line one sees too often, taking the very gloomy economic forecasts that were around in the second quarter of 2020, contrasting them with actual outcomes, and concluding that credit belonged to the policymakers (the Royal Commission hedges a little but is in the same camp with its “No doubt, these better-than-scenario outcomes reflected, at least in part, the speed and generosity of the Government responses”. But that simply has to be wrong. Treasury and Reserve Bank forecasters in the second quarter of 2020 knew all about the scale and nature of all those responses (economic and public health): the effects they expected were already embedded in their forecasts/scenarios. What actually happened was a massive forecasting failure, misunderstanding the nature of the shock and the way the balance of supply and demand pressures was likely to play out. Of course, plenty of private sector commentators and forecasters made the same mistake, but official failures had rather more consequences. </p> <p>The Royal Commission is keen on the Reserve Bank’s self-described “least regrets” strategy (which, incidentally, has just a single mention in the RB May 2020 MPS), by which they thought – sensibly enough – that faced with a big adverse shock you wanted to act early rather than late. The problem was never with that as applied to RB actions in March 2020, but that they failed to apply anything like the same logic when it started to be apparent that inflation was becoming a problem. They were slow to recognise the speed of the economic rebound or the emerging capacity and core inflation pressures, and were slow to act, and acting rather slowly (Orr to this day attempts distraction, around things like Ukraine that didn’t happen until after the economy was already well-overheated and core inflation had risen strongly). That series of mistakes – in common with many other central banks – added hugely to the overall cost to New Zealanders of the Covid experience, and we are still dealing with the aftermath now. The Royal Commission seemed much more inclined to channel Reserve Bank stories, down to and including repeating a cross-country chart from the Bank’s own self-defence publication designed to make New Zealand look good by using headline inflation in 2022 (much of Europe affected by a gas price shock) rather than core, and the level of unemployment (rather than either the change, the NAIRU gap or the output gap) when – quite unrelated to anything around Covid economic policy – New Zealand has one of the lower NAIRUs in the OECD. Most extraordinarily, and with no supporting analysis at all, the Royal Commissioners conclude that the severe inflation outbreak was an “unavoidable price” of good policies. If so, we’d really better change the Reserve Bank’s mandate, and perhaps whitewash from history their own very weak forecasts for inflation from late 2020 and early-mid 2021. They certainly didn’t think inflation was inevitable; they (paid to get these things roughly right) got their forecasts, and thus policy, badly wrong. </p> <p>Now to be fair to the Commissioners they do note the obvious, that both fiscal and monetary policy were too loose for too long, but it is all very subdued, and with no insight on what went wrong and why, or what might be better in future. There are complacent comments that if there were some gaps in Reserve Bank/Treasury coordination “it was good by international standards”, even as though offer no evidence for such claims. They don’t even mention – a point the Reserve Bank acknowledged in early 2020 – that the Bank had failed to ensure that negative interest rates were a technical possibility: had it been otherwise they might never have gone so big and so long on the LSAP, at such vast risk and (as it turned out) fiscal costs (the Bank, to be fair to them, had not historically been keen on LSAP types of instruments).</p> <p>I could go on with many smaller points, but that would mostly be to bore readers. I’ll end with just two: there is no attempt to evaluate whether the exporter freight subsidies really made sense, and for so long, nor is there any attempt to evaluate whether it made sense – as was done at the start of the pandemic response – to permanently increase welfare benefit levels going into a pandemic that was (a) likely to have large economic and fiscal costs, making us poorer on average, and b) wasn’t going to affect the real incomes of those on benefits.</p> <p>Overall, I thought this bit of the report was a serious lost opportunity. Perhaps the economic establishment (RB, Treasury, Grant Robertson) like it because there is no serious challenge or scrutiny, but just the appearance of it (a 700 page report don’t you know) but what use is that to New Zealanders, either in holding powerful officeholders to account (and yes time were tough but you take these jobs for the tough times) or in being better prepared for the inevitable future adverse shocks. </p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/01/30/reviewing-covid-experiences-and-policies/#comments">14 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72420" class="post-72420 post type-post status-publish format-standard hentry category-nz-politics"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/" rel="bookmark">Inflation (but not that sort)</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/" rel="bookmark"><time class="entry-date published" datetime="2025-01-22T10:12:21+13:00">January 22, 2025</time><time class="updated" datetime="2025-01-22T10:46:46+13:00">January 22, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/nz-politics/" rel="category tag">NZ politics</a></span> </div> </header> <div class="entry-content"> <p>The CPI will be out later this morning and I’m sure all eyes will be on that.</p> <p>But the Prime Minister’s reshuffle on Sunday prompted thoughts about inflation of another sort – the number of ministerial portfolios/titles in our executive government. When the reshuffle comes into effect on Friday there will (still) be 30 members of the executive (Cabinet ministers, ministers outside Cabinet, and parliamentary under-secretaries), 79 portfolios, and 6 distinct “other responsibilities” (and of course lots – 25 in fact – of “Associate Minister of” titles, but I’ll ignore those).</p> <p>This is how the official ministerial list is laid out these days.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/01/image.png"><img data-attachment-id="72424" data-permalink="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/image-319/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image.png" data-orig-size="1021,581" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image.png?w=700" loading="lazy" width="1021" height="581" src="https://croakingcassandra.com/wp-content/uploads/2025/01/image.png?w=1021" alt="" class="wp-image-72424" /></a></figure> <p>In this reshuffle, the Prime Minister didn’t add any new ministers (net), but he did add to the very long list of job titles: Tertiary Education and Skills was split into Universities (Reti) and Vocational Education (Simmonds) – as if (eg) law, accounting, or medical degrees weren’t primarily vocational – and a new “other responsibility” was created in the form of Minister for the South Island (like Minister for Auckland it isn’t a warranted portfolio). The new Minister for Economic Growth title was simply a relabelling of the old, and latterly unimportant (announcing handouts to various “major events” – check Melissa Lee’s press releases) Economic Development portfolio.</p> <p>Numbers of portfolios (and ministers etc) do fluctuate from time to time. Re portfolios, government re-organisations/reforms matter – eg the Minister of SOEs now has responsibility for a whole bunch of government trading entities that once each had their own minister (and others were sold). But the long-term trend has been solidly upwards.</p> <p>I went back to the New Zealand Official Yearbooks to get some snapshots each quarter century since 1900. (Here I simply followed the lists and counted “Deputy Prime Minister” and “Minister without Portfolio” as portfolios, a description here which does not distinguish (as NZOYB did not) between warranted and other distinct responsibilities. There were very few associate or deputy positions until the 2000 list)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/01/image-1.png"><img data-attachment-id="72427" data-permalink="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/image-320/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-1.png" data-orig-size="537,234" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-1.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-1.png?w=537" loading="lazy" width="537" height="234" src="https://croakingcassandra.com/wp-content/uploads/2025/01/image-1.png?w=537" alt="" class="wp-image-72427" /></a></figure> <p>The current Ministerial List structure seems to be available online back to about 2005. So for more recent years I used those lists. For what follows I’ve used Helen Clark’s final list (the numbers from her first list are in the table above), John Key’s first one, Bill English’s last one, Jacinda Ardern’s post-election 2017 and 2020 lists, a late one from Chris Hipkins, and Christopher Luxon’s first and most recent lists. I’ve shown both the number of warranted portfolios and the number of (distinct) “other responsibilities”, partly because over time some roles have gravitated from one column to the other with legislative change (eg responsibility for the SIS and GCSB), and partly because the older lists summarised above didn’t make the distinction).</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/01/image-3.png"><img data-attachment-id="72430" data-permalink="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/image-322/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-3.png" data-orig-size="920,309" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-3.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/01/image-3.png?w=700" loading="lazy" width="920" height="309" src="https://croakingcassandra.com/wp-content/uploads/2025/01/image-3.png?w=920" alt="" class="wp-image-72430" /></a></figure> <p>So that is two new records – 81 job titles in his first list a mere 14 months ago and 85 now – set by Luxon, leading the government that had won office on talk of government bloat etc. And if the number of members of the executive isn’t a new record, it is certainly right up there (we’ve had 120 MPs since MMP was introduced in 1996, and as recently as 1999/2000 had “only” 25 members of the executive).</p> <p>By contrast, in 1949/50 and 1975 – when the government had its hand in so much of the economy – National Party Prime Ministers Holland and Muldoon had governments with many fewer members of the executive and many fewer job titles (In 1991, Bolger had 25 people in the executive and about 70 distinct job titles).</p> <p>Do these job titles come at vast expense? No doubt, not (a few changes to ministerial letterheads). Most of the “grace and favour” ones seem empty or unnecessary or just a piece of cheap political rhetoric: “we care” about group or sector, x, y, or z. A cynic who I mentioned these numbers to wondered if perhaps Luxon might have a growth target of getting to 100 ministerial titles: Minister for Wellington, Minister for Regional North Island perhaps, or Minister for Catholics, Minister for Protestants, Minister for Other Religions, and Minister for Atheists? Given how much money we throw at the industry it is perhaps a little surprising that no PM has yet set up a “Minister for Film” or Minister for Gaming”. And in a few countries (including in our region) they do split Treasury and Finance into separate portfolios.</p> <p>It is insubstantial bloat – fault of successive Prime Ministers, although on this one Luxon appears to be the worst – made worse because every new portfolio titles attracts interested parties and pressure to “do something” under the aegis of that portfolio. Cynics suggest, for example, that the Minister for the South Island title was created mainly because there is no capable South Island minister actually in Cabinet, but presumably now the pressure will be on for James Meager to have some announceables (perhaps even some distinct bureaucrats). It just sends all the wrong signals from a government that talks about restraint, fiscal discipline, focusing on essentials etc. Much better to have slimmed the list of titles – and perhaps the list of people. Without more than two minutes effort I found it really easy to eliminate 21 of the job titles (and that is before starting on the associates – Associate Minister for Sport and Recreation anyone (that’s Chris Bishop by the way), and we once had an Associate Minister for the Rugby World Cup).</p> <p>Not only would ending the title inflation be quite possible here, it can be and is done elsewhere. In the UK, for example, (a much bigger country and Parliament) there are lots of junior ministers but <a href="https://assets.publishing.service.gov.uk/media/672c820fbd79990dfa67cab1/November_2024_-_List_of_Ministerial_Responsibilities.pdf">only around 30 distinct portfolio areas/titles</a>. <a href="https://www.pm.gov.au/your-ministry">Australia’s federal government</a> appears to have about 50. </p> <p>Where might one start? Well, consider James Meager (who seems a perfectly able person, so this is not intended as a reflection on him). He has been given 3 distinct portfolios/responsibilities – Minister for Hunting and Fishing, Minister for Youth, and Minister for the South Island – not one of which is actually needed (at least for anything other than political show).</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/01/22/inflation-but-not-that-sort/#comments">16 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72407" class="post-72407 post type-post status-publish format-standard hentry category-australia category-new-zealand-economic-performance"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/31/2025-and-what-might-have-been/" rel="bookmark">2025 and what might have been</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/31/2025-and-what-might-have-been/" rel="bookmark"><time class="entry-date published" datetime="2024-12-31T11:25:51+13:00">December 31, 2024</time><time class="updated" datetime="2024-12-31T11:30:58+13:00">December 31, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/australia/" rel="category tag">Australia</a>, <a href="https://croakingcassandra.com/category/new-zealand-economic-performance/" rel="category tag">New Zealand economic performance</a></span> </div> </header> <div class="entry-content"> <p>Okay, so the weather in Wellington is even less conducive to either being at the beach or in the garden than it was on Friday.</p> <p>Tomorrow it will be 2025. Once upon a time there was a government that adopted a goal of catching up economically with Australia by 2025. I don’t suppose the Prime Minister of the day – John Key – really cared that much for the goal, although for a while he articulated the rhetoric well enough, and he’d campaigned in 2008 on the continuing exodus of New Zealanders to greener pastures – well, higher incomes anyway, on a dry continent – across the Tasman. The goal, and the associated taskforce set up to advice the government on how it might get there, was more of an ACT win.</p> <p>Treasury provided the secretariat to the 2025 Taskforce, and since I was working at Treasury at the time, and as the chair was my old boss Don Brash, I ended up working extensively with the taskforce and holding the pen on most of the first report (after I went back to the Reserve Bank, Neil Quigley was contracted to write the second report, and I had less to do with that report). The first report was (very publically) binned by John Key the day before we released it. I later came to conclude that while I agreed with most of the long list of policy recommendations in the first report, they weren’t sufficient and overlooked one important issue in particular, but even if one disagreed with the specific policy recommendations – and Key clearly had no stomach for them – one might have hoped that his government (and those that followed) might be serious about the goal itself and looking for effective policy solutions. After all, as the 2025 Report pointed out in 2009 there had been a long history of politicians talking about catching up again with the best performing countries abroad (just no sustained success in bringing it about). (There is a link to both 2025 Taskforce reports <a href="https://www.treasury.govt.nz/publications/information-release/2025-taskforce">here</a>.)</p> <p>Here it is worth noting that even in 2008 Australia wasn’t one of the stellar advanced economies, with average real labour productivity (in PPP terms) not much above the median OECD country. Much better than New Zealand of course, and Australia mattered for us both as a natural point of reference in our part of the world (similar disadvantages of distance, similar cultures) and as the place where almost all New Zealanders could readily move if they chose (and hundreds of thousands already had).</p> <p>In this chart I’ve shown how things have actually unfolded</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png"><img data-attachment-id="72412" data-permalink="https://croakingcassandra.com/2024/12/31/2025-and-what-might-have-been/image-318/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png" data-orig-size="1038,689" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=700" loading="lazy" width="1024" height="679" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=1024" alt="" class="wp-image-72412" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=1024 1024w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png?w=768 768w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-22.png 1038w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure> <p>Over the full period we haven’t caught up with Australia, we haven’t even begun to close the gap, and instead the gap has widened a bit further again. Both series are noisy and subject to revisions (in New Zealand alone there are levels differences between the income and expenditure real GDP measures), but overall things have gone in the wrong direction. If one wanted to look on the less gloomy side, I guess one could note that whereas Australia has had no productivity growth at all since 2016, we have had a bit, but I wouldn’t put much weight on that myself (including with declining foreign trade shares, weak terms of trade). And although one could generate a bunch of other comparative graphs, it is productivity that ultimately underpins a country’s longer-run average prosperity.</p> <p>What I find most depressing – and why I have, somewhat gloomily, been anticipating for some years writing this post – is the lack of any apparent sense of urgency in New Zealand about turning things round or actually finally beginning to sustainably close the gaps. And that has been true really regardless of which parties have held office – if Key binned the advice on the 2025 goal and did little or nothing useful instead, Ardern/Robertson refocused the Productivity Commission on distributing the economic pie rather than growing it, and Luxon/Willis show no better than occasional conventional rhetoric on the topic. And all this against a backdrop where Australia has again made it easier and safer for New Zealanders to move across the Tasman.</p> <p>As it happens – and what reminded me to write the post – in the New Years’s Honours list released this morning, the government chose to <a href="https://www.dpmc.govt.nz/honours/lists/ny2025-onzm#wilkinsonbr">honour one of the members of the 2025 Taskforce, the economist Bryce Wilkinson</a>. That’s nice, but if I know Bryce I’m pretty sure he’d much prefer that governments – including this one – had gotten serious about finally reversing 70+ years of relative economic decline. That would have benefits for all of us, and for our children and grandchildren, who might be more interested in staying to build a better New Zealand.</p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/31/2025-and-what-might-have-been/#comments">10 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72380" class="post-72380 post type-post status-publish format-standard hentry category-fiscal-policy category-treasury"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/" rel="bookmark">The Secretary to the Treasury defending govt fiscal policy</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/" rel="bookmark"><time class="entry-date published" datetime="2024-12-27T11:54:36+13:00">December 27, 2024</time><time class="updated" datetime="2024-12-27T12:09:29+13:00">December 27, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/fiscal-policy/" rel="category tag">Fiscal policy</a>, <a href="https://croakingcassandra.com/category/treasury/" rel="category tag">Treasury</a></span> </div> </header> <div class="entry-content"> <p>I wasn’t envisaging writing anything more for a while, but….Welllington’s weather certainly isn’t conducive to either the beach or the garden, and the <em>Herald </em>managed to get an <a href="https://www.nzherald.co.nz/business/economy/treasury-ceo-iain-rennie-on-nzs-deteriorating-finances-lets-not-panic-but-lets-actually-sort-it-out/IR6MFKOB6VFTBBFC7NAOIFXXCE/">interview with Iain Rennie</a>, the new Secretary to the Treasury (not usually the sort of stuff for 27 December either).</p> <p>I’ve always been rather uneasy about heads of government departments doing interviews, on anything other than operational/internal matters for which they have specific personal responsibility. When they get onto policy it is never quite clear whether they are expressing their own views or championing those of the minister, and even if the former they are inevitably somewhat constrained by the views and tolerances of the minister. The primary responsibility, after all, of heads of policy agencies is provision of free and frank policy advice to the minister.</p> <p>Rennie does a bit of self-promotion, claiming that he is the sort of “change agent” the Minister of Finance has asserted that she wanted, and that he is at his best reforming things. I guess time will tell on the former claim – although count me sceptical – but his previous years in senior positions (Deputy Secretary at Treasury, State Services Commissioner) weren’t exactly known for being a reforming era, and it wasn’t obvious that he was an exception to that. And he was responsible for the appointment and reappointment of Gabs Makhlouf, who took Treasury in more of self-indulgent direction than one driving forward hardnosed and rigorous policy advice.</p> <p>He claims to be keen on The Treasury being more upfront and public about its view on possible reforms. I’m not sure that’s wise – hardly likely to strengthen effectiveness with the Minister when, as is inevitable at times, those views are very much at odds with those of the government – but I guess that is their call. Lets see, for example, what they come up with in the Long-term Insights Briefing they are required to produce next year. In any case, Rennie – creature of the 80s/90s Treasury – claims to be keen on more means-testing. Views will differ of course, but it has its own problems (especially once done across multiple programmes) and the last attempt to apply it to retirement income provisions did not end well.</p> <p>He also touched on tax. There is some ambiguity about that second para, but I take it that he is advocating taxing capital income at a lower rate than labour income. If so, he’d have my full support, but championing it in public is going to buy quite a fight – even with a notionally centre-right government that has just increased business taxation and shows no inclination at all to do anything about one of the highest company tax rates in the OECD.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png"><img data-attachment-id="72386" data-permalink="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/image-313/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png" data-orig-size="975,226" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=700" loading="lazy" width="975" height="226" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=975" alt="" class="wp-image-72386" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png 975w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-17.png?w=768 768w" sizes="(max-width: 975px) 100vw, 975px" /></a></figure> <p>But the real reason for this post – and the reason why I phrased the title of this post as I did – is Rennie’s apparent complacency on fiscal policy: it could have been channelling Willis. There is, we are told, no hurry to close the structural fiscal deficit </p> <p>“That’s why I’ve been very clear that fiscal consolidation will need to happen over a number of years.”</p> <p>We didn’t get into a structural deficit “over a number of years” (but quickly), we’ve now been running one for more than a few years, nothing done this year reduced the deficit, and on the government’s own projections any return to fiscal balance is still several years away. And this is in a country that was running surpluses less than five years ago (the first – and mostly necessary – Covid splurge was March 2020). Core Crown operational spending this year (24/25) is almost six percentage points of GDP higher than it was in the last full pre-Covid year (18/19).</p> <p>Now, it is certainly true that not all reforms can be done overnight, but that doesn’t mean that fiscal adjustment couldn’t – and shouldn’t – be done a great deal faster than either Robertson or Willis have been willing to contemplate. And there is not a sign of recognition from Rennie that the date for the return to fiscal balance has been pushed out again and again – it isn’t as if successive governments are making steady progress on a well-understood and stable forward track.</p> <p>There seems to much the same sort of elite resignation around productivity issues and failures. He seems willing to acknowledge that it is a significant issue, but with no sense of urgency, and no sense of just how deep-rooted the problems have become – weak productivity growth isn’t just some phenomenon of the last few years, but something that now dates back 70+ years in New Zealand, with no sustained period since when New Zealand has made any progress in closing the gaps.</p> <p>Rennie’s final comments are about comparisons with 1990/91</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png"><img data-attachment-id="72392" data-permalink="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/image-314/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png" data-orig-size="952,111" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=700" loading="lazy" width="952" height="111" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=952" alt="" class="wp-image-72392" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png 952w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-18.png?w=768 768w" sizes="(max-width: 952px) 100vw, 952px" /></a></figure> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png"><img data-attachment-id="72394" data-permalink="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/image-315/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png" data-orig-size="1003,466" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=700" loading="lazy" width="1003" height="466" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=1003" alt="" class="wp-image-72394" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png 1003w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-19.png?w=768 768w" sizes="(max-width: 1003px) 100vw, 1003px" /></a></figure> <p>Again, it feels more as though he is channelling his Minister, who desperately does not want to be compared with Ruth Richardson.</p> <p>A fair amount of the debate around 1990/91 is more about mythology than hard facts. Reasonable people might differ about the pros and cons of welfare benefit cuts then (as they might about the ill-judged increases in real benefit rates under the last Labour government), but….</p> <p>Here is total Crown primary (ie ex interest) spending in the fiscal years through that period</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png"><img data-attachment-id="72396" data-permalink="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/image-316/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png" data-orig-size="828,591" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=700" loading="lazy" width="828" height="591" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=828" alt="" class="wp-image-72396" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png 828w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-20.png?w=768 768w" sizes="(max-width: 828px) 100vw, 828px" /></a></figure> <p>Government spending was not slashed and burned. </p> <p>And what of that story of 15 years of failed fiscal adjustment. Here, from Treasury’s own data, is the primary balance from that era</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png"><img data-attachment-id="72398" data-permalink="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/image-317/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png" data-orig-size="884,520" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=700" loading="lazy" width="884" height="520" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=884" alt="" class="wp-image-72398" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png 884w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-21.png?w=768 768w" sizes="(max-width: 884px) 100vw, 884px" /></a></figure> <p>Very considerable progress had in fact been made in the previous few years, with large primary surpluses having been achieved (nominal interest rates at the time were very high, but much of those interest rates were simply compensation for inflation, not an additional real burden). Now, it is certainly true that in the dying days of the 1984-90 government fiscal discipline weakened – primary surpluses were smaller – but there were primary surpluses throughout. </p> <p>It is also true that at the end of 1990, there had been the second (and more severe) BNZ failure/bailout, unemployment was rising, and another recession was almost upon us. There were genuine fiscal surprises for the incoming government – and the ratings agencies – but the basic position, while well short of ideal, was not dire. And if net debt – at about 50 per cent of GDP – was higher than it should have been (and higher than today), it was pretty moderate by the standards of indebted OECD countries today. And, since Rennie rightly notes ageing population pressures on spending now and in the years to come, back in 1990, not only had the outgoing Labour government already put in place a plan to raise (very gradually) the eligibility age for the state pension, but the demographics going into the next 10-15 years were particularly favourable, since the birth rates 60 or so years earlier had been so temporarily low.</p> <p>Instead now we have deficits well into the future, no serious evidence (yet) of a government with a willingness to make hard adjustments, and demographic pressures that are already on us and will only intensify. It is, therefore, more than a bit disconcerting to hear such complacent noises from the Secretary to the Treasury, as if to pat us all on the head and say “don’t worry, we’ll get things sorted out eventually”. No doubt it will make for holiday reading for the public that the Minister of Finance will smile favourably upon. But one can only hope that when Rennie is alone with the Minister he is rather more urgent in his advice. If not, perhaps he really is the Secretary Willis wanted…..but the only sense in which he might then be a “change agent” is in somehow acting to help accustom us to a new grim reality in which neither main party is any longer that worried about returning to fiscal balance.</p> <p>Rennie’s final line was that one about there allegedly being “confidence” our “fiscal institutions” will respond and consolidate successfully. I’m not sure who has this confidence – perhaps a few members of the government party caucuses – or what foundation any such confidence might rest on. It feels more like wishful thinking, or just spin.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/27/the-secretary-to-the-treasury-defending-govt-fiscal-policy/#comments">9 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72359" class="post-72359 post type-post status-publish format-standard hentry category-fiscal-policy"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/23/fiscal-failure-and-indifference/" rel="bookmark">Fiscal failure and indifference</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/23/fiscal-failure-and-indifference/" rel="bookmark"><time class="entry-date published" datetime="2024-12-23T16:27:00+13:00">December 23, 2024</time><time class="updated" datetime="2024-12-23T16:51:38+13:00">December 23, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/fiscal-policy/" rel="category tag">Fiscal policy</a></span> </div> </header> <div class="entry-content"> <p>I was away in Papua New Guinea last week when the HYEFU came out, and have only just gotten round to looking at the numbers. Quite possibly, what is in this post will be repeating ground others have covered, and if so the post will end up being mostly for my records (good to be able to look back and see what one said at the time).</p> <p>It was this tweet from a non-partisan analyst that really caught my eye</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png"><img data-attachment-id="72362" data-permalink="https://croakingcassandra.com/2024/12/23/fiscal-failure-and-indifference/image-310/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png" data-orig-size="621,765" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png?w=244" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png?w=621" loading="lazy" width="621" height="765" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png?w=621" alt="" class="wp-image-72362" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png 621w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png?w=122 122w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-14.png?w=244 244w" sizes="(max-width: 621px) 100vw, 621px" /></a></figure> <p>Three sets of spending forecasts: those for Labour’s final Budget last year, those from last year’s PREFU (and available to political parties finalising their fiscal promises), and those from last week’s HYEFU. They run out only to the year to June 2027, because that is as far as the forecasts done in 2023 went.</p> <p>Spending on core Crown expenses is as higher or a little higher than in Labour’s last Budget.</p> <p>It isn’t because interest rates are higher (out of the government’s control); in fact, primary spending is also a touch higher over four years than was planned in last year’s Budget.</p> <p>It isn’t because of the state of the business cycle: the output gap forecast now for 26/27 is almost identical to that forecast for 26/27 in last year’s Budget.</p> <p>Overall, core Crown expenses are forecast to be 32.2 per cent of GDP in 26/27, up from 31.5% for 26/27 in last year’s Budget.</p> <p>And net debt (excluding the – quite variable – NZSF assets) is forecast to be $42 billion higher in 26/27 than was forecast just 18 months ago.</p> <p>Of course, defenders of the government will note that revenue forecasts are a lot lower. That is partly a matter of pure political choice – tax cuts – and partly a changed view on the potential rate of growth of GDP (not about the business cycle). But when the family’s income estimate are revised quite a bit lower over the medium term it would be usual to adjust future spending plans. But not, it appears, this government.</p> <p>For all the pre-election rhetoric, the current coalition government seems to be keeping right on with the path adopted by the previous Labour government, which had more or less abandoned (for practical purposes) any serious interest in running budgets in which the revenue raised paid for the groceries. National wasn’t very ambitious in its election campaign fiscal plans, but its numbers now represent deep underperformance even relative to those modest electoral ambitions. Will we see a balanced budget ever under Luxon/Willis. Unless something positive just happens to turn up it seems very unlikely – and with each passing year the ageing population fiscal pressures just keep mounting. If the failure is first and foremost the responsibility of the Minister of Finance, no Prime Minister can ever escape shared responsibility for this kick-the-can down the road approach to fiscal management.</p> <p>As a reminder of the broader fiscal position, here is Treasury’s chart showing the estimated cyclically-adjusted and structural deficits.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png"><img data-attachment-id="72377" data-permalink="https://croakingcassandra.com/2024/12/23/fiscal-failure-and-indifference/image-312/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png" data-orig-size="1046,654" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=700" loading="lazy" width="1024" height="640" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=1024" alt="" class="wp-image-72377" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=1024 1024w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png?w=768 768w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-16.png 1046w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure> <p>Not only is no progress at all being made at present, but the imbalances are a bit larger than those Treasury was estimating at the time of the 2023 Budget. People rightly criticised Labour’s fiscal excess, and the structural deficits they chose to incur. The coalition’s structural deficits are also pure choice – bad ones. And we can’t have much confidence in the eventual sluggish return towards balance after the next election – as for any government, forward operating allowances are no more than lines on a graph at this point, and the government has shown little inclination or ability to make and sell sustained hard fiscal choices consistent with those operating allowances.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/23/fiscal-failure-and-indifference/#comments">11 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72333" class="post-72333 post type-post status-publish format-standard hentry category-adrian-orr category-monetary-policy"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/04/orr-on-qa-part-ii/" rel="bookmark">Orr on Q&A – Part II</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/04/orr-on-qa-part-ii/" rel="bookmark"><time class="entry-date published" datetime="2024-12-04T16:08:19+13:00">December 4, 2024</time><time class="updated" datetime="2024-12-04T17:19:58+13:00">December 4, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a>, <a href="https://croakingcassandra.com/category/monetary-policy/" rel="category tag">Monetary policy</a></span> </div> </header> <div class="entry-content"> <p>My post this morning was based on Adrian Orr’s Q&A interview as found on TVNZ+. However, it turns out that that wasn’t the full interview which (thanks to the kind people at Q&A for pointing me to it) is now available on Q&A’s Youtube account <a href="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/">here</a>. The full interview is almost half an hour, and is probably worth watching if you haven’t already watched the selections on TVNZ+ – it is a more rounded presentation and chance for Orr to tell his story.</p> <p>As in the previous post, there was something in this bit of the interview where I welcomed the Governor’s comments. He lamented the underinvestment in official economic statistics, that has gone on for decades now, and suggested governments really should do better. And while he noted (fairly) that there is a lot more other data than there used to be, it remains something of an open question (would be interesting to see RB analysis of it) as to whether the Bank and other forecasters have gotten any better at recognising early quite what is going on in the economy and inflation. Perhaps 2020/21 was an unfair test, but we’ve seen a lot of lurches even this year from the MPC. But if the Governor is championing full monthly CPI and HLFS data and more timely GDP data, I can only agree with him.</p> <p>But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.</p> <p>There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png"><img data-attachment-id="72340" data-permalink="https://croakingcassandra.com/2024/12/04/orr-on-qa-part-ii/image-308/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png" data-orig-size="1298,728" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=700" loading="lazy" width="1024" height="574" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=1024" alt="" class="wp-image-72340" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=1024 1024w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png?w=768 768w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-12.png 1298w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure> <p>11.1 per cent isn’t even close to 15 per cent. Why does he just make these things up?</p> <p>(And a reminder of the graph in this morning’s post: on core inflation (the bit central banks do much about) we were simply middle of the pack in the OECD.</p> <p>I noted this morning that the LSAP hadn’t come up in that bit of the interview. It did in the fuller interview, and sure enough we get the repeated Orr make-believe blustery arguments. Not only had the Bank’s interventions saved the economy from a “deep recession” (quite how when as the Governor correctly notes the lags in monetary policy are long, and GDP here quickly rebounded after the first lockdown), but the costs (the $11bn or so of losses to the taxpayer) were “more than overwhelmed” by the “net benefits”. The net benefits have never been successfully identified, and the absurd claim needs to be read against the fact that overall Reserve Bank monetary policy calls led to the economy massively overheating, a severe outbreak of core inflation, big redistributions, and then a protracted – if not overly deep – recession to get things back to balance. Whatever the good intentions, there simply were no “net benefits” (probably few gross ones either) and large losses to the taxpayer. But Orr never engages straightforwardly on such issues. (For anyone who listens he cited some IMF work – I picked apart an earlier piece from the IMF on this issue <a href="https://croakingcassandra.com/2023/08/29/but-we-havent-had-a-three-year-negative-output-gap/">here</a> : the IMF had simply imagined a world (and economy) quite different from what New Zealand actually experienced.)</p> <p>There were two other interesting lines from Orr.</p> <p>The first was a bold statement that banks had been making “excessive profits”. Not high, but “excessive”. Quite what basis he as prudential regulator had for that claim isn’t clear, but he has long had it in for the Australian banks. He seems to consider it somehow unfair that the Australian banks are efficient low-cost operators.</p> <p>And the second was the claim that we are seeing unusual (greater than previously) changes in relative prices globally. Since oil prices were one of those he mentioned, here is a long-term chart</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png"><img data-attachment-id="72347" data-permalink="https://croakingcassandra.com/2024/12/04/orr-on-qa-part-ii/image-309/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png" data-orig-size="1057,1219" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=260" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=700" loading="lazy" width="888" height="1024" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=888" alt="" class="wp-image-72347" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=888 888w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=130 130w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=260 260w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png?w=768 768w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-13.png 1057w" sizes="(max-width: 888px) 100vw, 888px" /></a></figure> <p>The alleged greater volatility isn’t apparent there. Perhaps there is something to the claim more generally (would be interesting to see the analysis and data), but it seems unlikely, and perhaps particularly in the New Zealand context, where one of our most important relative prices is the exchange rate, which has displayed remarkably greater stability in the last decade or more than in the first 25 years after it was floated. </p> <p>Orr also claimed that inflation itself was going to be more variable, but again it isn’t obvious. There has been a bad outbreak of inflation a few years ago, now brought back under control, but is there really any evidence (beyond the Governor’s desperate desire to talk about climate change) for the proposition, or that it would matter if it were true (headline vs core considerations again)?</p> <p>Towards the end, Orr was talking up the strength of the Bank, notably the Board (signally underskilled in fact, with a chair reappointed who did/said nothing about the mistakes of recent years) and the MPC (most of whom we never or very rarely hear from, at least one of whom has no relevant qualifications at all). As for the rest of the senior management, those I have anything to do with (several) simply aren’t very impressive (in two cases “not very impressive” is to flatter). Perhaps when standards are that low Orr gets away with the sort of loose language, bluster, and Trumpian-style false claims internally (as well as the intolerance of dissent etc that he is known for). But it shouldn’t be acceptable in such a powerful figure, and if central bank Governors are never going to be some sort of single source of truth, at very least they should (a) prompt one to think, and b) not prompt one to worry that yet another claim just bore little or no relation to reality.</p> <p>But this is latter day New Zealand.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/04/orr-on-qa-part-ii/#comments">13 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72305" class="post-72305 post type-post status-publish format-standard hentry category-adrian-orr category-monetary-policy"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/" rel="bookmark">More outright dishonesty from Orr</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/" rel="bookmark"><time class="entry-date published" datetime="2024-12-04T10:53:02+13:00">December 4, 2024</time><time class="updated" datetime="2024-12-04T15:09:22+13:00">December 4, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a>, <a href="https://croakingcassandra.com/category/monetary-policy/" rel="category tag">Monetary policy</a></span> </div> </header> <div class="entry-content"> <p>The Reserve Bank Governor has given an interview to TVNZ’s Katie Bradford, apparently done under the aegis of the Q&A show but too late in the year to actually be broadcast on Q&A itself or to be done by Jack Tame, Q&A’s regular and most demanding interviewer.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png"><img data-attachment-id="72307" data-permalink="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/image-306/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png" data-orig-size="945,281" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=700" loading="lazy" width="945" height="281" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=945" alt="" class="wp-image-72307" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png 945w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-10.png?w=768 768w" sizes="(max-width: 945px) 100vw, 945px" /></a></figure> <p>There is a TVNZ article reporting the interview <a href="https://www.1news.co.nz/2024/12/04/reserve-banks-orr-on-housing-market-infatuation-covid-era-decisions/">here</a>, and you can find the full thing (only about 13 minutes) somewhere on TVNZ+ (my son found it for me). [UPDATE: Apparently that was only half the interview and the full 26 minutes is on the Q&A Youtube account.]</p> <p>What is reported in the article is pretty breathtaking, with Orr reported as standing by his (or, presumably, the MPC’s) decisions during and since Covid with no apparent regrets, and then moving on to attack the public and the media for being focused on housing and house prices. We – and he – might regret the fact that we do not have a well-functioning land supply/use policy regime, but we don’t, and haven’t done so for decades, so it should hardly be a surprise (or a cause for attack/lament) that when interest rates are cut in what proves to be an overheating economy house prices go up. </p> <p>But it got a whole lot worse when I listened to the full interview itself, where Orr seemed to just play on the fact that his interviewer wasn’t a specialist (with all the facts at her finger tips) to simply run claims that he knows not to be true. It was a reprise of his form earlier in this cycle when he repeatedly and deliberately misled Parliament’s FEC (but so supine are our democratic institutions that there were no consequences for what Parliament’s website solemnly assures us is a serious offence).</p> <p>Orr was asked whether the Bank had been too slow to raise rates (of course it was, as the Bank has even grudgingly acknowledged in the past). His response was to claim that the Reserve Bank of New Zealand was the 2nd or 3rd central bank to raise rates in 2021. It simply wasn’t so. Even among OECD economies – and there are only about 20 separate monetary policy areas in it (much of the OECD having just the euro) – the Reserve Bank was the 8th (equal) to move (those moving ahead of us were Iceland, Norway, South Korea, Mexico, Chile, Czech Republic, Hungary). Perhaps as importantly, the issue should never be about who went first or second, but whether a particular national authority moved sufficiently early and aggressively for the circumstances their own economy faced. On IMF estimates, New Zealand had the most overheated economy of any of the advanced country monetary areas it does the numbers for (a group which doesn’t include all those in the list above, but does include the US, UK, Canada, Australia, Japan).</p> <p>Orr then went to the claim that the Bank had been “lauded internationally – although not domestically” for being one of the most responsive central banks. It is certainly true that some market commentators have run such a line, but almost all of them seem to have had in mind the big countries and the Anglo countries, not the wider group of OECD economies. The Reserve Bank certainly wasn’t the slowest to move, but then it was dealing with a really badly overheated economy and should have moved a lot earlier. Their mistakes weren’t unique – misreading economies and pandemic macroeconomics was a common mistake, among central banks and private commentators – but they voluntarily took on the power and responsibility in New Zealand, and they actually made the bad policy calls, including increasing rates too late and initially far too sluggishly. Other people can hold their central banks to account.</p> <p>(And, of course, the MPC also lost $11 billion or so or taxpayers’ money punting in the bond market. TVNZ didn’t ask about that particular bad call so we were spared a repeat of Orr’s blustering attempts to defend that. Puts the cost of running an RNZN vessel straight onto a reef not realising the autopilot was still on in some perspective….)</p> <p>And then Orr claimed that the Reserve Bank was one of the few central banks confidently reducing policy rates. Which was a bit odd when most advanced country central banks have been reducing policy rates in recent months (obvious exceptions being Australia and Japan). But don’t let the facts get in the way of the Governor’s spin.</p> <p>He had the gall to round off that section of the interview by suggesting, rather patronisingly, to Bradford that “your potted history is kind of incorrect”. Dear, oh dear. This from a very senior and powerful public official. Is this the sort of thing the Minister of Finance expects/tolerates? (Well, on the evidence so far anything goes.)</p> <p>Bradford moved on. As was accepted, had it not been for the Covid outbreak in Auckland, the Bank would have started tightening at the August 2021 MPS (they actually started at the next review). So Bradford took a look at the projections in that Monetary Policy Statement. She pointed out (correctly) that in those projections, annual inflation was expected to be back down to 2.2 per cent by the year to September 2022 (with, as it happens, very little monetary policy help at all: as everyone agrees, there are long lags, and by the end of 2021 the OCR was expected to be only 0.75 per cent). I guess her point (obviously correct) is that the Bank was still badly misreading things by that point (and of course even now annual core inflation is still somewhere between 2.5 and 3 per cent, having required an OCR at 5.5 per cent to bring that about).</p> <p>But Orr wasn’t going to be bothered engaging with facts. Instead, we got the same old outrageous claims he used to try to fob Parliament off with. “Do you know what happened after that [August 2021]”, he asked. “We had the Ukraine invasion, rising food prices”, going on to add in cyclone effects and so on. He even had the gall to suggest that we had among the lowest inflation rate peaks in the OECD and that European countries had been dealing with 20 per cent inflation. It is an outrageous attempt to mislead and distract, simply breathtakingly dishonest, and especially so when set against any discussion of core inflation or the economic overheating. Take the New Zealand labour market for example: the unemployment reached its lowest level (extremely overheated) in the December quarter of 2021 (ie before the invasion), oil price pressures from the invasion never lasted long, and…..as importantly….both food and energy prices are typically “looked through” by central bank policymakers focusing on core inflation. On CPI ex food and energy measures, New Zealand’s peak was about middle of the pack among OECD countries (and the extreme headline numbers in a few countries were largely the result of the gas price shock to which New Zealand – no pipeline or LNG trade – was not exposed).</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png"><img data-attachment-id="72316" data-permalink="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/image-307/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png" data-orig-size="1009,563" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=700" loading="lazy" width="1009" height="563" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=1009" alt="" class="wp-image-72316" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png 1009w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-11.png?w=768 768w" sizes="(max-width: 1009px) 100vw, 1009px" /></a></figure> <p>As for cyclone effects on inflation, <a href="https://croakingcassandra.com/2023/08/19/misleading-parliament/">one of his own managers contradicted Orr in front of FEC last year</a>, to confirm that any effect was actually very small.</p> <p>Orr then moved on to an interesting claim (that I have not heard him make before, and which has not been documented in any published papers or material in MPSs) claiming a) that to have kept core inflation in the 1-3 per cent range the OCR would have to have been raised to 7 per cent on the first day of the pandemic, and b) that even if that had been done we’d still have had 6 per cent headline inflation. Neither result seems very likely, and given Orr’s record of just making stuff up should be heavily discounted unless/until they produce some robust formal estimates. On Orr’s telling it would have taken more monetary restraint to stop inflation getting away than it actually took to bring it down again once it had gotten away. That doesn’t seem very likely, and perhaps a useful counterpoint is the experience of Japan and Switzerland which didn’t cut policy rates into the pandemic, and didn’t see a particularly severe later inflation experience. As for the 6 per cent claim, that seems simply preposterous, since there has been no time in the last few years when the gap between headline and core inflation has been anything like as large as 3 percentage points.</p> <p>Later in the interview, questioning moved on to fiscal policy. Here I will give Orr credit on one point: he explicitly corrected the journalist to note that the current goverment had certainly cut spending, but that it had also cut taxes, and that the two effects were roughly even. This is exactly consistent with the estimates in Treasury’s cyclically-adjusted balance series (chart in Monday’s post), in which this year’s deficit is just a touch larger than last year’s. Of course, it would have been nice had the Bank made this point in its MPSs, instead of spending the last 18 months – both governments – avoiding the issue and focusing on largely irrelevant series of government consumption and investment spending (rather than the cylically-relevant) fiscal balance and fiscal impulse measures.</p> <p>For the rest of it, Orr was back in his preferred space, playing politician and advancing personal political and ideological agendas that are simply out his bailiwick. It was, we were told, critical for governments around the world to close infrastructure deficits and New Zealand’s was “one of the worst”. He appeared to attack a focus on reducing deficits and keep government debt in check, suggesting that the government needed to spend “a lot more” on infrastructure, suggesting that New Zealand had been failing in this area since World War Two (a claim that of course went unexamined – in fairness no time – but presumably includes overbuilt hydro power capacity, sealed roads in the middle of nowhere etc). Now, in fairness, he did also talk about enabling private capital – this the same Governor who only a few months ago was <a href="https://croakingcassandra.com/2024/06/10/foreign-direct-investment-the-governor-and-governments/">bagging foreign investment</a> – but the overwhelming tone was to welcome more public debt. Waxing eloquent he launched into Labour Party and left wing themes about how great it would be if governments were investing and delivering more “social cohesion” (around whose values Governor?), an “inclusive economy” and so on. </p> <p>In any sane environment it would have been to have significantly overstepped the mark, but Orr has done that so often – and worse, with all the misrepresentations and denials – with no consequences (no rebuke from the Board or minister(s), reappointment for a final term comfortably secured, tame board chair reappointed etc) that no doubt it will again pass with little notice.</p> <p>It really was a pretty disgraceful, if again revealing, performance. But then the fact that Orr still holds office, and the incoming government – that used to rail against him and his style and the corporate bloat – has been content to see things just run on as usual, is just another sad reflection of the debased state of New Zealand public life and standards. One of many to be sure, but no less acceptable for that.</p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/04/more-outright-dishonesty-from-orr/#comments">1 Comment</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72280" class="post-72280 post type-post status-publish format-standard hentry category-housing category-treasury"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/" rel="bookmark">Where were the central agencies?</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/" rel="bookmark"><time class="entry-date published" datetime="2024-12-03T09:04:00+13:00">December 3, 2024</time><time class="updated" datetime="2024-12-03T09:15:51+13:00">December 3, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/housing/" rel="category tag">Housing</a>, <a href="https://croakingcassandra.com/category/treasury/" rel="category tag">Treasury</a></span> </div> </header> <div class="entry-content"> <p>Back in early October I wrote a post <a href="https://croakingcassandra.com/2024/10/07/public-policy-just-keeps-on-worsening/">“Public policy just keeps on worsening”</a>, on the then newly-announced Residential Development Underwrite scheme, under which the government will provide free downside price/liquidity insurance to big residential property developers, for a period that was said not to be forever but with no specific time limit, and instead with confident assurances from the minister (Bishop) that the government (Cabinet) would judge when to turn this subsidy off and on. It seemed like a classic example of bad policy, playing favourites at the big end of town, offering subsidies with no rigorous analysis of any sort of market failure, handing unconstrained discretion to ministers, and so on.</p> <p>All this was stated to be being done with the primary objective of “maximising overall housing supply, while minimising the risk and cost to the Crown”. On which I noted in the earlier post</p> <blockquote> <p>You minimise the cost and risk to the Crown by simply not offering free insurance, and if you must offer such insurance you should do so with a disciplined and transparent model (to, for example, estimate the economic price of the option). But there is nothing of that sort in any of the MHUD material, just a lot of mention of the (extensive) discretion afforded to officials, of whom we may be left wondering both what their expertise is and what their incentives are. Why would we back them to make better choices than financial market participants? And as for “maximising housing supply”, there seems to be no analytical framework there either, including around incentives on developers (who will, of course, prefer free insurance and can be expected to try to game the rules). Will there be any material impact on supply, will any impact be any more than timing, and how will MHUD rigorously evaluate claims put to them by developers? Oh, and isn’t developers finding themselves with overhangs of houses and land part of the way that much lower house prices actually come about?</p> </blockquote> <p>I ended that post this way</p> <blockquote> <p>It is a rather sad reflection of how the quality of New Zealand policymaking has fallen. Perhaps we should be grateful that exchange rate cycles aren’t what they were – and that past governments were less prone to scheme like this – or who knows what sort of free insurance the government would be dreaming up for exporters.</p> <p>Who knows what the relevant government agencies thought of this scheme. I’ve lodged OIA requests and am particularly interested in any analysis and advice from The Treasury and the Ministry for Regulation.</p> </blockquote> <p>You might have thought an arbitrary and apparently inefficient intervention like this would be grist to the mill for that new “central agency” the Ministry for Regulation, an opportunity to show any microeconomic chops they had. Instead, like true bureaucrats, they took a full 20 working days to reply to my OIA request to tell me that the new ministry had undertaken no analysis and offered no advice related to the Residential Development Underwrite scheme.</p> <p>But I suppose I should be grateful they only took 20 working days (note that the law does not automatically give agencies 20 working days: the standard is “as soon as reasonably practicable). The Treasury, by contrast, took 40 days, insisting that they needed time for “consultations”.</p> <p>Their full response is here:</p> <p><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/treasury-oia-reply-re-residential-development-underwrite-scheme-dec-2024-1.pdf">Treasury OIA reply re Residential Development Underwrite scheme Dec 2024</a></p> <p>There were only five papers. Two were from after the scheme was announced (operationalising the required ministerial delegations). The first two aide memoires were from January and February respectively in response it appears to advice from the Ministry of Housing and Urban Development, concerned about a possible “hard landing” in the housing construction market, and picking up on discussion of underwrite schemes that had been put in place as part of the ill-fated Kiwibuild scheme.</p> <p>This is from the first of those aide memoires, dated 17 January</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png"><img data-attachment-id="72290" data-permalink="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/image-302/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png" data-orig-size="815,266" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=700" loading="lazy" width="815" height="266" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=815" alt="" class="wp-image-72290" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png 815w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-6.png?w=768 768w" sizes="(max-width: 815px) 100vw, 815px" /></a></figure> <p>That is a pretty astonishing paragraph. Neither here, nor anywhere else in the papers, is there any attempt to justify a claim of “market failure”, and while we can all agree that government land-use restrictions have created and exacerbated many problems in the housing and urban land market they aren’t in any meaningful sense “government failures” either, but rather choices which governments could undo if they chose. And nothing in the first two sentences provides any serious or analytical support for the third sentence, apparently supporting fresh interventions. (There is of course little doubt that government interventions can affect the level of activity in particular markets, but the question is the robustness of the case for any such interventions.) That last sentence is also perhaps a bit puzzling: isn’t a subsidy to private developers going to add to private construction activity (not crowd it out?) and how are the efficiency and value-for- money tests even plausibly met when guarantees are handed out for free?</p> <p>Carrying on through the papers we find this snippet</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png"><img data-attachment-id="72292" data-permalink="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/image-303/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png" data-orig-size="859,83" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=700" loading="lazy" width="859" height="83" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=859" alt="" class="wp-image-72292" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png 859w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-7.png?w=768 768w" sizes="(max-width: 859px) 100vw, 859px" /></a></figure> <p>Really? Our Treasury thinks a mitigant is that bad underwrites can simply be stuck in the bottom drawer in the hope that one day something will turn up…. And here one thought a wider goal of a housing reform process was permanently lower real house prices.</p> <p>And these from the 16 February aide memoire</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png"><img data-attachment-id="72294" data-permalink="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/image-304/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png" data-orig-size="894,196" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=700" loading="lazy" width="894" height="196" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=894" alt="" class="wp-image-72294" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png 894w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-8.png?w=768 768w" sizes="(max-width: 894px) 100vw, 894px" /></a></figure> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png"><img data-attachment-id="72295" data-permalink="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/image-305/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png" data-orig-size="816,168" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=700" loading="lazy" width="816" height="168" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=816" alt="" class="wp-image-72295" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png 816w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-9.png?w=768 768w" sizes="(max-width: 816px) 100vw, 816px" /></a></figure> <p>But there is no robust analysis anywhere, including not scintilla of analysis leading us to believe that Treasury had thought hard and robustly about why judgements of officials and ministers were likely to be better than those of private financiers, including reflecting hard on the incentives facing the two groups. Perhaps this is more of an example of ‘government failure’.</p> <p>But what is perhaps more surprising still is that those notes were written in January/February, and then there is nothing released (or withheld) until the next document, which is dated 3 October. The Residential Development Underwrite scheme was announced on 4 October.</p> <p>There are several things interesting about this aide memoire</p> <ul> <li>(rather trivially) Treasury has withheld, as out of scope, more than half of the title of the aide memoire, only to release the title in full in their letter to me</li> <li>much more substantively, the paper is dated 3 October, and is described as being for a meeting with the Minister of Housing on 7 October. The paper goes on to note that, as far as Treasury understood things on 3 October, “the RDU will be announced before the end of October”. It was, of course, announced the following morning.</li> <li>and perhaps most remarkably of all, the substance of the RDU section of the aide memoire is just slightly more than one page, and is really all process oriented, and answer one detail question from the Minister of Finance about scope for changing the parameters once the RDU was in place.</li> </ul> <p>In other words, assuming (as we must) that the OIA has been answered honestly, there was no Treasury advice at all on the specific development of the RDU, or any of its parameters, and the scheme itself was rushed out far more quickly than The Treasury had understood just the day before the actual announcement.</p> <p>It is a poor and unnecessary policy, underpinned it appears by a poor policy process, a central planners’ mentality (government knows best how many houses should be built etc) and a cast of mind from The Treasury that seems astonishingly more sympathetic to big-end-of-town corporate welfare handouts and ministerial discretion than would have seemed even remotely plausible in the heyday of The Treasury. And perhaps, as is the nature of so many of these sorts of interventions, many economists are suggesting that the residential building approvals cycle was already bottoming out even before ministers and bureaucrats rushed out their shiny new subsidy toy.</p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/03/where-were-the-central-agencies/#comments">6 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72251" class="post-72251 post type-post status-publish format-standard hentry category-new-zealand-economic-performance"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/" rel="bookmark">The PM and economic performance</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/" rel="bookmark"><time class="entry-date published" datetime="2024-12-02T10:20:44+13:00">December 2, 2024</time><time class="updated" datetime="2024-12-02T10:38:05+13:00">December 2, 2024</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/new-zealand-economic-performance/" rel="category tag">New Zealand economic performance</a></span> </div> </header> <div class="entry-content"> <p>This post was prompted by watching the Prime Minister’s interview on Q&A yesterday (where I don’t think either the interviewer or the PM did particularly well). My interests here are only in the first (economic) half of the interview.</p> <p>Minor things first. You had to wonder about the staff work when the PM professed to have no idea that on the IMF forecasts New Zealand’s annual real GDP growth is around the 10th worst of the 190 or so places the IMF does numbers for. It is a line Auckland professor Robert MacCulloch has been running for some time, and others have picked up and repeated his point (including <a href="https://wordpress.com/stats/post/70202/croakingcassandra.com">me</a>, more than a year ago). If you (or your staff) don’t read them, then Google’s AI Overview tells the same story for real per capita GDP.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png"><img data-attachment-id="72254" data-permalink="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/image-296/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png" data-orig-size="984,394" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=700" loading="lazy" width="984" height="394" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=984" alt="" class="wp-image-72254" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image.png 984w, https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image.png?w=768 768w" sizes="(max-width: 984px) 100vw, 984px" /></a></figure> <p>That’s pretty bad (and, to be clear, it is not Luxon’s government’s fault).</p> <p>Perhaps less importantly, asked which countries hadn’t had a bout of really high inflation, Luxon had no idea (Japan and Switzerland would have been reasonable answers). And he seemed to have no idea either when Jack Tame asked if he was aware of any forecasters who’d become more optimistic on New Zealand’s medium-term economic performance since the government had taken office.</p> <p>At a political level, one might wonder why Luxon allowed himself to be caught up in the obscure question of whether people at the bottom had improved their relative position in the last year. I suspect most voters for the governing parties weren’t really motivated by wanting to see more redistribution to the bottom (I remain staggered at the fact that in the first pandemic handout package – in a shock that seem likely to make the whole country poorer – Labour permanently increased real welfare benefit levels).</p> <p>But lets come back to inflation? Luxon (and his ministers, and predecessors) have been loudly proclaiming for some time that the reduction in inflation (headline inflation currently 2.2 per cent, core measures rather higher) and the associated reductions in the OCR have been due to the efforts of the new government sworn in on 27 November last year. It is such a preposterous claim, and yet there seems to have been very little pushback against it, whether from journalists and interviewers or from the political Opposition (the latter perhaps preferring to keep quiet, lest focus come on the fact that inflation got away on their watch and they still reappointed the culprits – notably the Reserve Bank Governor).</p> <p>Why do I say that it is preposterous? The bottom line of course is that we have an operationally independent central bank and its Monetary Policy Committee. They may not be very good at their job – they let inflation get badly away, were late and slow to react even when they saw the inflation, and their communications and policy have lurched all over the place as recently as this year – but…..they control the OCR lever, they generated the recession we’ve been over last year and this, and they (belatedly) got inflation back down again. Serious economic observers know this. The Prime Minister knows this. But he just repeats what is little better than a lie.</p> <p>And, as Jack Tame noted to the Prime Minister, inflation has been coming down in lot of (advanced) countries, reductions that were presumably not caused by the election of the current coalition in little old New Zealand. Central banks globally have belatedly done their jobs. If the system didn’t work fully as it was supposed to – such blowouts of core inflation were never supposed to happen again – at least the fallback worked and inflation generally now seems more or less back to around target(s).</p> <p>So, at best, the Prime Minister’s claim (if it had any substance at all) must be that somehow things his government had done had meant inflation this year had come down faster than it would otherwise have done. Unfortunately, the Reserve Bank does not publish forecasts for core inflation measures (and current headline numbers get messed around by one-offs, whether oil prices changes or changes to government taxes and charges). But the Reserve Bank’s last projections done before this government took office (the Nov 2023 MPS) had headline inflation comfortably inside the target range by now, and – perhaps coincidentally – I see that the November 2023 projections for quarterly inflation in the Dec 2024 and Mar 2025 quarters are exactly the same (0.4 and 0.5 per cent respectively) as those in last week’s <em>Monetary Policy Statement.</em> It would be fair to note that the OCR projections/actuals are much lower, but it was always a mystery a year ago why the MPC then thought the OCR now would still be 5.7 per cent even with inflation comfortably inside the range. They were, eventually, mugged by reality.</p> <p>But there are two problems with any suggestion from the Prime Minister that his government can take the credit for the inflation outcomes we’ve already seen.</p> <p>The first is timing. As central bankers rarely fail to remind people, monetary policy works with lags. Changing policy today might not affect inflation very much at all in the first quarter or two, and won’t have its full effect for perhaps 18 months. That is why monetary policymakers put so much emphasis on projections. The government was sworn in on 27 November, and the September quarter CPI (the 2.2 per cent annual headline rate the government likes to talk up) was measured at mid-August. So there was basically eight months from when the government took office to when the CPI was measured. Even had fiscal policy been materially adjusted (actual money going out the door) in the first few weeks, there just wasn’t enough time to have had much of an effect on (core) inflation, or what monetary policy was required. </p> <p>In principle, perhaps, the expectation of swingeing fiscal policy adjustments might just have done the trick – expectations do affect behaviour – but that wasn’t what the coalition, now in government, either promised or did. Any return to operating balance or surplus was going to be done pretty gradually, over multiple years.</p> <p>And there was to be no adjustment at all in the first year. Don’t take it from me. This chart is taken from the recent speech by The Treasury’s Chief Economic Adviser and reports numbers published with this year’s Budget.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png"><img data-attachment-id="72257" data-permalink="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/image-297/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png" data-orig-size="884,729" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=700" loading="lazy" width="884" height="729" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=884" alt="" class="wp-image-72257" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png 884w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-1.png?w=768 768w" sizes="(max-width: 884px) 100vw, 884px" /></a></figure> <p>The blue line is the cyclically-adjusted balance, and you can see that the projected deficit for this (24/25) year is no smaller (in fact, a little larger) than the estimated cyclically-adjusted deficit for 23/24. Yes, there have been spending cuts (and some tax increases, notably the egregious removal of depreciation on buildings for company tax purposes), but this year they have all (and slightly more) gone to fund a range of new giveaways (tax cuts, childcare subsidies etc). It was pretty much what was promised, but it simply isn’t fiscal consolidation and it hasn’t put, and isn’t putting, downward pressure on demand or inflation. If you wanted to be particularly harsh you could contrast this year’s Budget with the 24/25 HYEFU numbers, but as they were largely on the previous government’s policy it is probably fair to set them aside as akin to vapourware.</p> <p>So:</p> <ul> <li>(core) inflation is coming down in a bunch of countries,</li> <li>central banks have (belatedly) done their jobs,</li> <li>New Zealand inflation was forecast to be well inside the target range by now, on RB projections from just prior to this government taking office,</li> <li>anything but the most draconian fiscal adjustments simply wouldn’t have had time to have made a material difference to inflation by the time the Sept CPI was measured, and</li> <li>in any case, there has been no aggregate fiscal consolidation yet (cyclically-adjusted deficit this year is estimated to be slightly bigger than that last year).</li> </ul> <p>The rank dishonesty of the claims coming from the government hardly conduces to lift confidence and trust in governments more generally.</p> <p>Oh, and if the government were really serious about much better performance on inflation, you might have thought that they’d have replaced the chair of the Reserve Bank Board (which is supposed to monitor MPC on our behalf) and not extended the term of an elderly non-executive member who has been in office right through the costly and enormously disruptive monetary policy mistakes of recent years.</p> <p>What of fiscal policy itself? It doesn’t bode well when a new government does no aggregate fiscal adjustment in the first year of a three year term, having inherited – and known pre-election it would inherit – a structural deficit, in which not even the cost of the groceries was being covered by tax revenue even when the economy was fully employed. The government has already continued the drift evident in the last couple of years of Labour, with the crossover point for getting back to a balanced budget drifting relentlessly into the future.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png"><img data-attachment-id="72264" data-permalink="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/image-298/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png" data-orig-size="662,381" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png?w=662" loading="lazy" width="662" height="381" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png?w=662" alt="" class="wp-image-72264" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png 662w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-2.png?w=300 300w" sizes="(max-width: 662px) 100vw, 662px" /></a></figure> <p>Recent comments from The Treasury, from senior minister Chris Bishop (“we won’t be a slave to a surplus”) and the silence of the PM yesterday more or less assure us that when the HYEFU numbers come out in a few weeks, the return to balanced budget will have been delayed yet again. Pretty soon we’ll be on a track for decade of Robertson/Willis deficits, with the 14 straight years of balanced budgets or surplus under National and Labour governments in the 90s/00s just a dim memory for the economic historians. The Prime Minister seems unbothered, happy to mouth rhetoric about being ‘committed to getting to surplus” …..one day perhaps, but not now (and note that comments from Barbara Edmonds over the weekend suggest that Labour is no better). The fiscal pressures of an ageing population – especially pointed when no one will adjust the NZS age – get not a mention. Oh, and Luxon had the gall to suggest that there was a need to be “fiscal conservatives”. A balanced budget would be nice Prime Minister.</p> <p>And then there is what should be the enormous elephant in the room: productivity. Luxon was happy to acknowledge it was an issue (even Labour ministers used to do that) but not much more. </p> <p>Here is the path of New Zealand real GDP per hour worked since just prior to the start of the last major recession. It is a bit less bleak than one in the recent Treasury speech (I think because I’ve allowed for a 2016 break in the hours series) and I’ve added the orange line (stylised) to take account of the revisions to real GDP over the last couple of years – which will boost measured productivity – that SNZ announced the other day were coming later this month.)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png"><img data-attachment-id="72267" data-permalink="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/image-299/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png" data-orig-size="1034,766" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=700" loading="lazy" width="1024" height="758" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=1024" alt="" class="wp-image-72267" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=1024 1024w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=300 300w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png?w=768 768w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-3.png 1034w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure> <p>If it isn’t as bleak as Dominick Stephens’ chart, it is still pretty bad. Since about 2012, productivity growth (allowing for the revisions) has averaged only about 0.5 per cent per annum, and although Covid disruptions mess up the picture there isn’t much basis for seeing things under the previous National government as much less bad than those under the recent Labour government. Now, people can fairly point out that productivity growth in recent years has been poor in a range of advanced countries (US excepted) but…..we start from so far behind many of those countries that it isn’t any sort of excuse. For 40 years, the goal of catching up with the OECD leaders has been talked about, but hardly ever has there been any progress in that direction. It would take a 60 per cent (or more) lift in average New Zealand economywide productivity – on top of whatever growth the leaders were achieving – to close those gaps. It was a shame that Tame didn’t take the opportunity to point this out (it isn’t exactly state secret data). </p> <p>As for Luxon, there was brief mention of his mantra – his five point plan for productivity. The problem with his five point plan isn’t that there is necessarily much wrong with items in it, but that it simply isn’t equal to the scale of the challenge. You don’t get big game-changing results off a series of really rather small policy changes, even when they are eventually implemented (eg nothing necessarily wrong with trade agreements with the UAE, but it is pretty small beer, and successive governments have been signing such deals for years, even as the export share of our economy has been shrinking). There is no sign or sense of much urgency, or of ideas or policies equal to the task.</p> <p>Tame did ask about the company tax rate, although he didn’t point out that ours is now one of the highest among OECD countries, or that the company tax rate is particularly important for foreign investors. Luxon, sadly, had no substantive response other than to briefly note that it wasn’t “a focus”. There has been money for giveaways, but not for either closing the deficit or for initiatives that might actually make some longer-term difference to the attractiveness of business investment in New Zealand. </p> <p>Finally, Tame made the fairly effective point that if the government was really getting things back on track and improving economic performance, surely it should be showing through in economists’ medium-term economic forecasts. His researchers had found no evidence that any forecaster had in fact revised up their medium-term forecasts.</p> <p>I’m not sure what measure he was using or how many forecasters he checked, but in that vein this table summarises the Reserve Bank’s projections for “trend productivity” growth from the <em>Monetary Policy Statements</em> going back to November last year (completed just before the government took office)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png"><img data-attachment-id="72274" data-permalink="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/image-300/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png" data-orig-size="673,276" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png?w=673" loading="lazy" width="673" height="276" src="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png?w=673" alt="" class="wp-image-72274" srcset="https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png 673w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png?w=150 150w, https://croakingcassandra.com/wp-content/uploads/2024/12/image-4.png?w=300 300w" sizes="(max-width: 673px) 100vw, 673px" /></a></figure> <p>I wouldn’t necessarily put too much weight on those numbers. The Reserve Bank isn’t a productivity-focused agency, and these numbers probably won’t have had much, if any, MPC attention. But, equally, the Reserve Bank has no particular partisan axe to grind, and their numbers don’t seem inconsistent with the spirit of the sorts of comments coming out of The Treasury in recent months. It is all rather grim, and the Bank forecasts using government policies as put in place, not some idle wishlist of things that might – but probably won’t – be.</p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2024/12/02/the-pm-and-economic-performance/#comments">8 Comments</a></span> </footer> </article> </div> <nav role="navigation" id="nav-below" class="paging-navigation"> <h1 class="screen-reader-text">Post navigation</h1> <div class="nav-previous"><a href="https://croakingcassandra.com/page/2/" ><span class="meta-nav">←</span> Older posts</a></div> </nav> </main> </div> <div class="secondary widget-area" role="complementary"> <aside id="block-2" class="widget widget_block"> <div class="wp-block-jetpack-subscriptions__supports-newline wp-block-jetpack-subscriptions"> <div class="wp-block-jetpack-subscriptions__container is-not-subscriber"> <form action="https://wordpress.com/email-subscriptions" method="post" 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