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. If you (or your staff) don’t read them, then Google’s AI Overview tells the same story for real per capita GDP.
Click to view
That’s pretty bad (and, to be clear, it is not Luxon’s government’s fault).
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.
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).
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).
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.
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).
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 Monetary Policy Statement. 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.
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.
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.
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.
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.
Click to view
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.
So:
So:
- (core) inflation is coming down in a bunch of countries,
- central banks have (belatedly) done their jobs,
- 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,
- 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
- 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).
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.
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.
Click to view
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 days 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.
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.
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.)
Click to view
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).
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.
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.
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.
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 Monetary Policy Statements going back to November last year (completed just before the government took office)
Click to view
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.
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.
8 comments:
Economics aside, there a whole host of subjects on which the Prime Minister is either grossly ignorant or badly misinformed or both. But of course he's a really great manager so none of this matters, right?
I recall Robert MacCulloch's blog before the election and he was mystified why the National Party didn't attack Labour over the IMF ranking on economic growth. He had contacted National about it so a bit strange Chris Luxon hasn't heard about it.
What was that little Quango the new Government abolished last year. Oh yes, that's right. It was called the Productivity Commission. Seems someone decided it was bad politics to let a Government agency constantly point out that voters are lazy. Pity about the optics. If the Government wants to do something about poor productivity it might start by abolishing Matariki Day.
It's OK.
National are going 'to get things done'
The PM is pleased to get things done in Queenstown like building more houses. There you go. Productivity.
He is cleverly managing to avoid a referendum on the key issue facing NZ's future as a productive first world economy. But the price is great damage to his own integrity. How long can he keep this up?
Lets discuss productivity instead of the Wellington blather around endless graphs . Work that creates something as an asset or something to sell or export can be included in productivity. Government Office style corporations and Government departments sell nothing , achieve less and require taxpayer funds to exist . They should be completely removed from any graph that discusses productivity.
Basil provides fair comments in my view - we know that we have a significant bureaucracy for a small population, so much so that the govt is working (against much resistance) to regain at least a semblance of efficiency. But productivity is irrelevant to these departments (a sweeping statement, I know, and in some cases perhaps a wee bit unfair), and as Basil noted, their efforts shouldn’t be included in a nation’s productivity stats.
The interview mentioned was something of a shipwreck. Jack Tame is becoming another Tova O'Brien. It's all about the ego of the interviewer. They put a loaded question to the guest and are not satisfied until they get the answer they want (which may not be the correct answer anyway) The only thing that matters is the interviewer can look important. There are no competent current affairs reporters left
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