Michael Reddell: Willis and Rennie speaking

Last week various of the great and good of New Zealand economics and public policy trooped off to Hamilton (of all places) for the annual Waikato Economics Forum, one of the successful marketing drives of university’s Vice-Chancellor.

My interest was in the speeches delivered by the Minister of Finance and by Iain Rennie, the newly appointed (by this government) Secretary to the Treasury. The Minister also used her speech to announce the launch of a Going for Growth website complete with a 44 page document (15 of which are photos and covers, and another 9 are lists of things (being) done) titled “Going for Growth: Unlocking New Zealand’s Potential” – in the Minister’s words, “Going For Growth outlines the approach the Government is taking to turbo-charge our economy”.

Yeah right.

Now, to be clear, there are some (mostly small) useful things the government has done in the area of economic policy. There are also some (fewer in number) overtly backward steps (eg increasing effective company tax rates by eliminating tax depreciation on buildings, free liquidity insurance for big end of town property developers, debt to income limits imposed by the Reserve Bank), and some important areas where the government has so far failed to act at all (eg last year’s Budget didn’t reduce, and actually marginally increased, the estimated structural fiscal deficit). There is just nothing in what the Minister said, or in what the government has done (or has concretely indicated it will shortly do), that comes even close to being likely to “turbo charge” the economy. It isn’t even clear that either the Minister or her Treasury advisers has anything close to a compelling model and narrative about how we got into the longer-term productivity mess, let alone how we might successfully get out of it (if any politicians really cared enough to want to do so).

Take the Minister’s speech first. I read it against her speech to the same forum last February, given just a couple of months after she had taken office. In that speech we got quite a lot of good stuff about things the incoming government had quickly undone. It made a reasonably impressive list for a first couple of months. By contrast, it is thin pickings in this year’s speech.

We are told, for example, that

Leaders around the world are being compelled to act more boldly than they have for several decades

But there isn’t much sign of it – with the growth focus she talked of – in either what the government is doing, or in what is discussed in the speech.

It isn’t a long speech (just under 8 pages of text) but two full pages are devoted to supermarkets. It is the centrepiece of the speech, to an economics forum just a couple of weeks after the Prime Minister’s big push on emphasising growth-focused policies. Now, I’m as much in favour as the next person of removing regulatory restrictions that might impede the entry of new supermarket competitors – and of cutting company tax rates when possible (which bear particularly heavily on overseas investors’ calculations) – but as the focus of the Minister’s speech it seems like not much more than populist rhetoric. One could eliminate every cent of supermarket profits in New Zealand – which presumably no one wants to do, because unprofitable businesses tend not to keep operating – and it might lower grocery prices by 5 per cent of so (half that for some more realistic scenario based on claims around “excess profits”). Nice to have of course, but not exactly transformative even for households, let alone for the productivity and performance of the economy as a whole. And yet the Minister touts there as being “massive gains for Kiwi shoppers”. And as for suggestions that the government might help hold the hands of potential entrants, how about just getting the regulatory roadblocks out of the way for everyone, rather than rewarding lobbying with special treatment for those who have a taste for and knack of bending the ear of governments for favourable treatment for their particular firms?

Following on from those two pages, the Minister lists four other areas of potential policy overhauls:

• Government procurement rules. There is talk of a review underway. It sounds sensible enough (but nothing specific), but it is a little hard to believe that what might eventually be delivered will be any sort of game-changer
• Tax settings. Here the Minister tells us that “I am considering a range of proposals to make out tax settings more competitive over time”. Which is fine, but….there is barely any mention in the speech of the fiscal constraints (the structural deficit the government has so far done nothing about), or of course of the fact that the government increased taxes on business just last year.
• Affordable energy sounds like a good thing of course. But there is nothing specific in the speech, and in fact there is a potentially troubling reference to potential steps “the Government may need to take to incentivise new generation”. Other than removing regulatory roadblocks and, perhaps one day, tax imposts?
• Savings. Here there is disconcerting talk of changes to KiwiSaver rules, although probably in the end with marginal effects at best (or worst). There is talk of enabling more investment in private unlisted assets, even though KiwiSaver fund managers may have little expertise in those sectors, and liquidity and valuation challenges will be very real. There is the suggestion that more KiwiSaver balances should be invested in New Zealand, which makes little sense for individual New Zealand savers’ whose assets these are and who diversification imperatives should be driving a heavy weighting on international assets. The Minister tells us she is looking at taking options to Cabinet, but since there is little evidence that difficulty of raising wholesale funding has been a major obstacle to growth in New Zealand it is difficult to see that whatever she comes up with is likely to make much useful change.

And so, almost half way through the government’s term, supermarket reform seems to be what the Minister is holding out as the big prospect (and of course there is Kiwibank, another much-touted cause likely to deliver little useful).

What of the Secretary to the Treasury’s speech? You may recall last year that it was reported on several occasions that the Minister of Finance was wanting bold, fresh, innovative thinking from whoever got the job (and since she sets out the search requirements and Cabinet makes the appointment, it really is a government appointment, one in which PSC simply acts on their behalf).

I’m fairly ambivalent about heads of Treasury giving public speeches. On the one hand, it should be an opportunity to advertise the analytical chops of the Secretary and his/her team, and thus to be welcomed. On the other hand, the Secretary and the Treasury are the government’s principal economic advisers and those internal relationships are much more substantively important than Treasury public speeches. There are distinct limits – quite severe limits in practice – on what the Secretary can really say, since he or she can’t really be out of step with the Minister in public. Which means it is never quite clear whether what we are hearing is their best professional analysis, or just what they more or less have to say.

I was pretty underwhelmed by Rennie’s speech, and perhaps the more so as it was I think his first on-the-record speech, and was being delivered not to a provincial Rotary club but to a significant professional economics and policy forum. No one forced him to accept the speaking invitation, and so we might reasonably have expected the best Treasury had to offer.

Instead, we got a fairly once-over-lightly treatment of both the productivity and fiscal challenges, and the highly dubious claim – but perhaps it went over well in the Beehive – that “the Government already has a significant economic reforms programme underway”. Really? Do tell. Interestingly, on the productivity side of things Rennie stated (of Treasury) “we are confident that we understand the basic problems”. But there was little in the speech to suggest that they really do. Instead, we get the same rather mechanical growth-accounting stuff that The Treasury has been trotting out for 20 years, and that has found its way into speeches by ministers too.

Thus, we are told that “New Zealand’s low capital intensity is a key driver [note the choice of words] of our poor productivity performance”. No one disputes that business investment as a share of GDP has been low in New Zealand for a long time, more particularly when considered in the light of rapid population growth. So the capital stock per worker is, in some mechanical sense, quite low. But what this approach invites – and has for the 15-20 years Treasury has been running this line – is some of “lump of capital” fallacy, that if only more capital was thrown at the economy things would be much better. It is also captured in comments from both the Secretary and the Minister that are reasonably read as suggesting that somehow individual firms are making bad choices and not putting enough capital into their production processes.

The mentality is all wrong. Low levels of capital intensity are at best seen as symptom not as any sort of cause or “driver” of productivity growth failures economywide. New Zealand has never had a particularly problem attracting finance – for example, for decades we’ve financed largish current account deficits even as on average the real exchange rate has stayed high. And we should assume that, on average, firms and potential investors are responding rationally, and even optimally on average, to the opportunities they face. So the issue is not that firms are failing to use enough capital in their production processes – they are most likely doing what is best for them – but that, having regard to all the other constraints (taxes, FDI rules, RMA regimes, other bits of regulation, real exchange rates) there just aren’t that many attractive projects here in New Zealand. A highly successful New Zealand economy would be likely to be more capital intensive (and generate higher wages),but focusing on the capital intensity or otherwise is the wrong lens with which to look at the problem. Firms and investors respond to opportunities, and sometimes (often) governments get in the road and make investment (particularly that in the tradables sector) unattractive.

The emphasis on “capital intensity” also drives a focus – and it is there is the Secretary’s speech – on something labelled “savings policy”. I suspect there is a more sophisticated analysis behind some of this stuff, but again the way it comes across is to feed a mentality that if only more “savings” were available more productivity would flow. As already noted, we’ve had no problem attracting generic foreign savings, but government policies do make business investment proposals often rather unattractive, whether the potential finance is from domestic or foreign sources.

Rennie also addressed (or largely avoided addressing) the fiscal challenges. “Avoided addressing” because he was more or less stuck with his Minister’s choice to go very slowly and to keep postponing the date for a return to structural fiscal balance. Instead we get lines like “the current Government has committed to concrete steps to address structural deficits” – which is generous at best, since they have taken few actual concrete steps, and have only “committed” to the variable vapourware of future (changeable) operating allowances – and suggestions that somehow adjusting over a long period of time is just fine, when there was never a robust economic case for the current structural deficits at all.

And then of course there was the heartwarming, somewhat detached from reality, ending

Governments need to make progress in the here and now. Our job is to advise them on which pathways are the best to start walking down. We do think hard about a coherent programme, drawing on evidence and judgment but also remain mindful of the uncertain connections between policy changes and policy outcomes when you look out over the horizon. Over time governments will choose to stride faster or slower down those paths. The important thing is to keep taking those steps and maintain momentum across a broad front of economic and fiscal policy frameworks.

First, it has an implicit assumption that Treasury knows what is best to do, whether around fiscal or productivity issues. This is the same Treasury that was advising Grant Robertson only a couple of years ago that higher spending was just fine, the Treasury that seems keen on more active use of fiscal policy (notwithstanding where that mentality got us in the last few years), and the same Treasury that does not have and has not had a compelling narrative around productivity failures or solutions. And then there is the rather delusional suggestion that, Treasury having identified the right paths, different governments might just walk them at different paces. The real world is one in which different governments will, at times, be walking in almost exactly the opposite direction to what either fiscal prudence or better productivity performance might call for. One might think of raising corporate taxes last year, or film and gaming subsidies, or…..or……or……. (all parties, all governments).

Perhaps it really is the case that all the answers to New Zealand’s economic woes rest with failure to adopt the old-time religion. I rather doubt it, but whatever the case the sad reality of the Secretary’s first public speech is that there was no sign even of fresh or interesting ways of articulating the old-time religion or any interesting or bold new angles.

But that probably suited his political masters.

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. This article was sourced HERE