Michael Reddell: Treasury says one thing in a speech but quite another in the BEFU

I picked up The Post this morning to find the lead story headlined “Recession hits homes harder than businesses”, reporting a speech given earlier this week by Treasury’s deputy secretary and chief economic adviser Dominick Stephens. There was an account of the same speech, but with some different material, on BusinessDesk a couple of days ago. Astonishingly, despite being an on-the-record address, on what are clearly high profile macroeconomic issues, including touching on monetary policy, The Treasury has not issued the text of the address, so the rest of us – not the Auckland “business crowd” who heard it live – are entirely reliant on journalists’ reporting of what the chief economic adviser to the government’s principal economic adviser (which is how Treasury likes to style itself) actually said, let alone the context within which he said it. That seems less than ideal (to say the least).

The remarks, as reported, were no better, and seem remarkably loose from a very senior Treasury official. They also seemed at odds with – if probably somewhat more accurate than – the story Treasury was telling in Budget Economic and Fiscal Update (BEFU) only two months ago. I have long defended New Zealand’s system, in which the BEFU documents and forecasts are the best professional view of The Treasury, and are not the views of the Minister of Finance. The Secretary to the Treasury has to affirm this with each EFU

On the basis of the economic and fiscal information available to it, the Treasury has used

its best professional judgement in preparing, and supplying the Minister of Finance with,

this Economic and Fiscal Update.

Ministers spin, while public servants – a fearless Treasury – is supposed to be providing the Minister and the public with an unvarnished best professional view. That isn’t always easy for public servants – who have to deal with ministers and their offices every day on multiple matters – but if they aren’t up to that standard, they shouldn’t take the jobs.

Take this from the BusinessDesk report

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It seems pretty clear that Stephens is claiming that they knew there was a quite serious recession underway running into the Budget, including as context for decisions ministers were making then, and that they knew things were getting quite a bit worse.

But….here are The Treasury’s quarterly GDP forecasts (quarterly per cent changes) from the BEFU

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What they actually told the public (and ministers presumably) is that they thought that there had been positive GDP growth in the March quarter and that growth would be picking up – to at least semi-respectable levels – over the rest of the year. Now, in fairness, the economic forecasts are finalised quite early (in this case 5 April), but the text of the BEFU wasn’t finalised until 23 May (well after ministers had made their decisions and just a few days before delivery on 30 May). So there was plenty of opportunity to ensure that this view – a deepening recession – made it into the text, as an update to the older numbers.

So I went and checked the text. In dozens of pages of text, the word “recession” does not appear once – whether about the past year or the period ahead – and neither do “recessionary” or “downturn”, let alone perhaps more loaded words like “slump”.

So there seem to be three choices. Either The Treasury wasn’t providing us (or ministers) with their best professional forecasts and commentary, or Stephens is now rewriting history (consciously or not) to make Treasury look more prescient than it really seems to have been, or that Stephens – the chief economic adviser – had a quite different view from his boss, the Secretary, at the time the BEFU was done. My money is on the second of those explanations….which, frankly, if true is a pretty poor show from such a senior public servant. Perhaps there is something to the third story, but if there were such differences they shouldn’t be showing up like this.

There seems to have been another interesting contrast between BEFU and the Stephens speech. The Post’s report says “Stephens also confirmed the finance minister’s position that her Budget was disinflationary despite giving Kiwis more cash through tax cuts”. That description is reported, rather than a direct quotation, but if it is accurately reported it seems at odds both with The Treasury’s own published estimates in the BEFU, in which the structural deficit actually increases a little in 24/25 over the previous year, and also somewhat at odds with these words from the BEFU itself. This is from the very first page of the BEFU Executive Summary

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Treasury expected that GDP would be picking up (see chart above) partly because of the boost to private sector incomes from the tax package. All else equal, that adds to inflationary pressures (and recall those structural balance estimates). (Note that the Minister of Finance is still stonewalling, deliberately delaying the release of actual Treasury advice in this area.)

Then there was this – the big text extract readers of The Post will have seen this morning –

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Really? One of the biggest recessions we’ve had? This from the same agency – principal economic adviser to the government no less – that reckoned that GDP growth would be positive all this year. (Incidentally one wonders what the Minister of Finance, her office, or PMO thought when they read this story this morning.)

From later remarks in the article it would appear that Stephens is talking about per capita GDP – which has already fallen about 4 per cent from peak – but no one, no one, is going to compare the sort of economy we are now facing with the experience in, say, the 1991 recession. The big difference isn’t just that the economy had been subdued then for years before the specific 1991 downturn, but that the unemployment rate rose from just over 4 per cent to just over 11 per cent. Last we saw, Trreasury was picking the unemployment rate will peak next year at not much over 5 per cent. Perhaps there has been a radical change of view since BEFU, but if so perhaps Treasury could lay out some numbers, in a text or document we all have access to.

Stephens’ commentary on other matters also seems very very loose. Take those comments about the “fiscal response to Covid”. He seems not to give any weight to monetary policy, which in the way our system is set up is supposed to move last to keep overall economic activity close to potential and inflation close to target. Governments can spend freely or not, and it isn’t supposed to lead to a grossly overheated economy followed by a nasty recession. And while Stephens claims that we had a “really very big boom”, it really wasn’t that big – incomes just didn’t grow that much (real gross disposable income per capita at peak was just 3 per cent above the March quarter 2020 level), and while the economy became very stretched for a time (on RB estimates the biggest output gap in decades), the peak was really very shortlived. It was as nothing compared to past booms (whether the 2000s or the mid 1980s).

Somewhat surprisingly, Stephens was also apparently – description of his comments rather than a quote – offering a Treasury view on the OCR (“The Treasury is sticking to its guns and predicting interest rates will start to fall in September because there’s still work to do on bringing down non-tradeable inflation, said Stephens”). Which seems a bit odd given that the Secretary to the Treasury is herself a non-voting member of the Monetary Policy Committee. I’m all in favour of MPC members generally offering their views and analysis in public, but even in more transparent systems overseas it is rare for MPC members to be quite that blunt about specific forthcoming OCR decisions. And if Stephens wasn’t speaking conscious of Treasury’s MPC spot, he really shouldn’t be second-guessing, or perhaps implicitly pressuring, the independent central bank MPC in public. Frankly, it all seemed a bit half-baked.

Now, and to be fair, there was one bit of his reported remarks that I really liked (as which I have heard him articulate before at a Treasury seminar)

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In principle that is exactly right (in practice, there is inevitable uncertainty about just how much, how deep, and how long will prove to have been required). (Incidentally “slowdown” does appear in the BEFU, but about productivity growth and about events abroad.) There is a price to be paid when our macroeconomic policymakers stuff things up, and unfortunately that price is paid by us and not by them.

But although that “this is the recession we had to have” type of sentiment is quite right, I’m then left wondering why Stephens was muddying the water by suggesting – reported in both articles – that events in China explain our recession (expected or otherwise). They simply don’t. The rest of the world – and China is a major source of demand globally, not just re New Zealand – is just one of the many factors the Reserve Bank has to take into account in setting monetary policy. So far they have judged that this downturn is what we had to have (rightly or wrongly, but if they thought otherwise they’d already have cut the OCR). Our policymakers did it to us – and given the stuff-up in 2020/21 it had to happen – not people or countries beyond our control.

There is a suggestion (this from Matthew Hooton’s column yesterday) that ministers have joined the club of those underwhelmed by The Treasury

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but you’d like to think that a Kaikohe bookkeeper would keep matters rather tidier and more disciplined that what was on display this week from Treasury and its chief economic adviser.

Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.