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and they have to consult the public on both choice of topic and the draft report
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Count me more than a little sceptical. Good agencies, addressing significant issues/challenges, would in days gone by been offering serious analysis and free and frank advice in Post-Election Briefings, which used to be written with a clear expectation that the same advice/analysis would be offered no matter which party won (I still remember finalising one such Reserve Bank briefing at about 6pm on election day, with a clear expectation that we had to be finished by the time the polls closed). Good agencies, dealing with complex analytical issues, will also often be publishing research from time to time. So I’m at a bit of a loss to understand what the Long-term Insights Briefing provisions are meant to add, other than more bureaucratic overlay. And if, perhaps, good agencies could readily find a first topic, churning out something different every three years feels like it will quickly become a compliance burden and little more.
But government department chief executives are stuck with the law as it is, including no less than the outgoing Secretary to the Treasury. Her staff are currently consulting on a proposed topic for their next Long-term Insights Briefing, complete with the somewhat pointed observation that resources available for “department stewardship work” are “finite” (presumably, “so don’t expect too much”). Submissions close on Friday, for anyone interested in sending them some comments (I sent in a few quick comments yesterday).
The proposed topic is focused on “sustainable and resilient fiscal policy over economic cycles”, and thus is quite (and probably appropriately distinct from the long-term fiscal pressures that Treasury addresses in its (also now somewhat repetitive) statutorily-required Long-term Fiscal Statement.
Ever since 2020, The Treasury has seemed to be hankering to use fiscal policy more actively for counter-cyclical stabilisation purposes. In a speech in 2021 (which I wrote about here), the Secretary (and those around her) were talking up what fiscal policy could do in this area. Those were the days before it was clear that both inflation and fiscal deficits had gone badly off the rails. But the enthusiasm still seems to be there. There was the work Claudia Sahm has been doing for them on so-called semi-automatic stabilisers, which I wrote about a few weeks ago. And now there is this consultation document, which has in it a very strong flavour of wanting to see fiscal policy used more actively for countercyclical purposes. If it was perhaps pardonable to think about that in the abstract five years ago, you’d have hoped that the actual experience of the last four years would have prompted a rethink, and some fresh humility. But there is no sign in Treasury’s consultation document that they plan any sort of hardheaded review of the experience of fiscal policy here since the start of 2020, or the use of active fiscal policy in other countries either in the 2008/09 recession or since 2020. You’d certainly get no hint that years after the shock – that did warrant deploying some government expenditure resources – we are now stuck with structural deficits, and successive governments repeatedly extending the horizon for a return to surplus.
Treasury repeatedly, and after all this time I can only conclude deliberately, choose to conflate counter-cyclical macroeconomic stabilisation (a role that has long been assigned primarily to monetary policy) and other natural or established functions of government (eg income support in crises, or tail risk insurance). Treasury officials like to talk up the wage subsidy scheme. And it isn’t unreasonable that they should do so, as income support (even if it was, arguably more generous than was really needed). When the government compels people to stay at home and directly or indirectly shutters their businesses, it isn’t an unreasonable quid pro quo (citizens might reasonably demand it) that governments ensure people can keep body and soul together (perhaps even keep together established employment relationships). Income support is something governments can do, and do quickly. Macroeconomic stabilisation policy isn’t primarily about income support, and typically doesn’t, and doesn’t need to, operate that fast. And income support might be needed even if the economy as whole was overheating (eg production was cut but expenditure demands stayed high). They are simply too different functions, and shouldn’t be conflated, either conceptually or in practical policymaking. One can think too – Treasury does – of things like the fiscal consequences of severe earthquakes. Such activity is likely to be net stimulatory for the economy as a whole (this was something the RB recognised way back in the first days after the 2011 quake). If the severe quake happens to come at a time when the economy has a lot of excess capacity – as was the case in 2010/11 – there is no tension between the two. But earthquakes don’t conveniently time themselves to fit the state of the economic cycle. The next severe one might hit when the economy happened to be already overheated for other reasons. In those circumstances, what it was right (or legally obligatory) for governments to do wouldn’t materially change. Managing the overall macroeconomic consequences – crowding out other spending to make way for this combination of government and private activity – would then just be the Reserve Bank doing its job. Two quite separate jobs, two quite separate set of tools. And yes, big government spending commitments have macro consequences, but the system is set up for the Reserve Bank to take those into account, to move last, and – as far as they are capable – maintain price stability.
One might think it was a bit of a fool’s errand to defend monetary policy after the experience of the last few years. But, if anything, I think it is to the contrary. What the last few years actually show – and I suspect the Governor would agree (he used to say it in 2020 and 2021) – is the potency of monetary policy. When mistakes are made it can do a great deal of damage (viz, the most severe outbreak of inflation in decades) but it can also be turned around very quickly (see the 525 basis point rise in the OCR in 19 months) and inflation is on course for being at target again before long. It would, clearly, have been better if they’d not made the mistake in the first place, but that is a forecasting and macroeconomic comprehensions issue not one about the tools – and an issue that faced The Treasury just as much as the Reserve Bank (noting that the Secretary to the Treasury now sits on the Monetary Policy Committee). Reversing fiscal policy is just evidently a great deal harder – not just here, but in most countries at most times. So-called “shovel-ready” projects, designed to provide short-term stimulus, were still going on years later, having exacerbated inflation pressures in the meantime.
Treasury has also appeared to be hankering for a greater role for itself using as justification the effective lower bound on nominal interest rates. This was an issue the Reserve Bank saw itself facing in 2020, belatedly realising it had done nothing for years to even alleviate the self-imposed problem. But it is also an issue that is quite easily fixed technically, and you might think that a Treasury – both sitting on the MPC, and concerned about unnecessary fiscal pressures, difficulty of reversing fiscal imbalances etc – would have been at the forefront of insisting that the Reserve Bank and the Minister of Finance get this technical issue fixed. It isn’t of course a problem today – with the OCR still at 5.5% – but no one has any great confidence where the neutral rate is, or how deeply below it the OCR might need to go in the next severe recession.
Treasury may think my comments are a little unfair. There is other stuff in their (short) consultation document, but nothing in what they have presented suggests anything like an appropriate degree of critical scrutiny of options for more active use of fiscal policy, or of their own fiscal policy advice in the last few years.
Perhaps it doesn’t matter that much. The new government seems unlikely to be interested in more-active fiscal policy (with asymmetric risks), and in some respects the Long-term Insights Briefing has the feel of a compliance burden they simply have to jump through. But if the work is going to be done it needs to be done in suitable critical and hard-headed way.
One of the questions Treasury poses is around “what rules and strategies can be used to support a credible commitment to rebuilding fiscal buffers after negative shocks”. Personally, I think there is a fairly simple response to that. Severe adverse shocks will come, and they will tend to be asymmetric, but fiscal policy is unlikely to knocked off the rails if there is a strong and shared commitment to a modest structural surplus. There will be one-offs that mean that in the year of a disaster (pandemic or earthquake) the cyclically-adjusted balances will be in deficit, but keeping the structural balance in modest surplus – and quickly restoring surpluses if there are unanticipated deviations – is the simplest and surest way to keep fiscal capacity able to do stuff only governments can do, while leaving countercyclical macro stabilisation to monetary policy, the tool best suited (and largely costless to the Crown) to doing that job. Unfortunately, the Treasury of the last decade – and more specifically the last four years – has tended to talk and write in ways that leave political parties more comfortable in deviating from that sort of standard.
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.
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