Coming back a little later, it was very quickly clear just how much spin was involved in that headline. And that, while journalists really should dig even slightly deeper than a ministerial press release, the headline could perhaps be excused when one looked at the Minister of Finance’s own press release. And, critical as I sometimes am of Reserve Bank Board chair Neil Quigley, it should be said that if his press release wasn’t very illuminating, it also played things straight. The “25%” did not come from him. (In fairness to RNZ, their headline was what I noticed, but some other media seem initially to have fallen for the spin.)
Here was the key bit of the Minister’s press release
Here was the key bit of the Minister’s press release
Click to view
I’d heard a while ago that the Bank had bid for in excess of $1 billion for the coming five years, and had struggled to quite believe it. But it turned out that that story was accurate. It was quite remarkable, even coming from the noted empire builders, Orr and Quigley. But what empire builders bid for going into budget round (in this case the Funding Agreement round) is really neither here nor there. Kids want lots more pocket money too, and yet the extent to which their desires are not met tells us nothing about actual parental restraint. Of course $1.03bn wasn’t going to be “value for money” when most observers struggled to work out how Orr/Quigley had ever persuaded Grant Robertson to allow the evident bloat that had occurred over the last few years.
Which leads us onto a genuine puzzle. You’ll note that the Minister refers to an operating budget for the current financial year of $200 million. She also refers to it twice in the short paper she put to Cabinet’s Expenditure and Regulatory Review Committee.
But in the most recent variation to the previous Funding Agreement, signed by Grant Robertson just weeks before the 2023 election, provided for operating expenses (those covered by the Agreement) to be $149.44 million in the year ending 30 June 2025. And the Bank’s own published Statement of Performance Expectations for the year to 30 June 2025 showed a budget for Total Operating Expenses of $231 million. The $231 million will, presumably, have included some items not covered by the Funding Agreement, but we – and Ministers – are left with no idea where the Minister’s $200m comes from or how it relates to the $149.44m that Grant Robertson had approved for that same year. The Bank’s Annual Report says they had underspent their budget in the 2024 year, so perhaps there was some catch-up spend while they could. But whatever the case it is very hard to see anything like $200m as some sort of baseline annual operating spending (although presumably Orr had tried to make it so to justify his billion dollar five year bid).
This is the core section of the new Funding Agreement
Click to view
On headline numbers, the Bank is being allowed to spend in the coming financial year 3.7 per cent more than Grant Robertson in August 2023 thought was appropriate/necessary in the current (24/25) financial year. Headline inflation came down pretty much as had been expected in August 2023 and is now pretty close to the midpoint of the target range. Some restraint…… Things get a bit tighter for them in the following couple of years, although nothing has been released so far to explain the phasing. Perhaps they’ll have some redundancy costs in the first (2025/26) year?
Note also the list of things the Bank spends on that aren’t covered by the Funding Agreement is noticeably longer than the list in the previous one. Some of the changes are small (eg the exclusion for the Bank’s legacy superannuation scheme used just to be for actuarial gains and losses, while now it is for any expenses – and the Bank meets most of the direct admin expenses associated with the scheme) but others don’t look very small at all.
Click to view
I’d have thought costs associated with refurbishing or replacing the building would have been expected to be met from depreciation. But apparently not. And the Bank has been spending a lot of money over several years pursuing its CBDC dream (the solution in search of a problem). Those expenses were presumably covered by the Funding Agreement in the past, but a material chunk of them now appears to have been moved outside that limit. (I’ll save for another day the question of why a Minister preaching fiscal restraint is letting them continue to pursue this – at best – nice to have.)
There was also this new exclusion
Click to view
The simple comparison between past and present Funding Agreement operating expense numbers seems to exaggerate (by unknown amounts) the extent of any restraint. And even if we discount that problem, the massive expansion and bloat made possible under Orr seems to have been largely cemented in. Approved operating spending (inside the Funding Agreement scope) in the final year of the new agreement appears to be just 6 per cent lower than it would have been if Grant Robertson’s last approved number had just been increased by 2 per cent a year (midpoint of the target range). Real spending had roughly doubled during the Orr years, even on that Robertson number for 24/25 – which appears to have been far below actual spending this year. These aren’t exactly the much-vaunted “frontline services”)
And, as the Minister had advised her Cabinet colleagues, it wasn’t as if the growth had been in core statutory functions
Click to view
Now, it is pretty clear that the Bank had been remiss in maintaining its IT systems and needed to spend more, but on the table included in the Cabinet committee paper, IT spend doesn’t look as if it stands out. The Bank just grew a great deal, least of all in the most core function around monetary policy, and now Willis is proposing little more than stopping the growth. We should, I suppose, be thankful for small mercies, and that the Orr/Quigley bid wasn’t accepted, but really……in a time of very straitened fiscal circumstances.
Here is the table on where the money has been spent
Click to view
The Cabinet committee paper reveals that there had been a suggestion of cutting by more, but the Minister had had her arm twisted by Quigley (probably after Orr left).
Having presumably been told that their billion dollar bid was simply unacceptable
Click to view
Frankly, it doesn’t seem very persuasive, given that Treasury had been looking at the numbers for months and had even engaged an external consultant to help them. 4 per cent lower spending might have started to look like making real inroads in reversing the bloat, but….the Minister simply gave it away, with no indication of what it was that Treasury had not previously appreciated about the scope for savings.
It is all pretty underwhelming, and perhaps does not bode well for the extent of fiscal restraint we might see in next month’s Budget. Structural deficits don’t close themselves.
Finally, lets return to some of the statutory provisions. It remains pretty astonishing that the Funding Agreement – authorisation to spend for five years for a major public policy agency – no longer requires parliamentary approval. It is a gaping democratic deficit introduced by the previous government, and means there is also no parliamentary debate on how much this behemoth spends, let alone on what.
On which note, note (f) below. In today’s release there is no sign of any such budget, so we have no idea where the Bank intends to make savings.
Click to view
and in case you are wondering, yes the law does require the budget to be published with the Funding Agreement (or any variation to it, as in 2023)
Click to view
SImple defiance of the law (as it seems, and as it seemed in 2023) seems more Trumpian than the way we do things in New Zealand. But there is no sign of a budget, with the required detail, with either the Bank’s or the Minister’s releases.
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.
3 comments:
Seems a huge sum to support the Reserve bank when their function seems to be largely just fiddling the OCR. I suppose it takes considerable labour to establish the inflation figure but the subsequent setting of OCR would seem within scope of an intelligent sixth former. (Indeed, the bank runs or did an annual school competition for an accompanying speech!)
Michael ; Thank you for the essay, as I still wonder about the performance of Mr Orr and his abrupt "leaving the office."
Surely the $200m budget should be explained to NZers as for my wishes and can't have , the $45m difference would have funded the Americas Cup in Auckland
1) In the schedule Growth in FYFA- Group functions , I note the absence of the year 2019/20 and ask for your analysis / reasoning.
2) The double asterisk notes that an increase of 600% and without the 2019/20 year included it is interesting at the least .
3) I note , The budget has to be placed before parliament in 12 sitting days which is 4 weeks after easter and is into June.
Seems the obfuscation will be unfortunately embedded by then.
One wonders if the RB were an everyday punter buying a house whether their income and expenditure was adequately explained? Like the departed's waistline, there does seem an extraordinary amount of 'bloat' in an organisation that is regulatory in its basic function - that is, until it started hugging Kauri trees.
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