“Government is stuck in a fiscal holding pattern”

Bernard Hickey thinks that the Government is “stuck in a fiscal holding pattern” this term due to their commitment to Budget Responsibility Rules, which committed them to get net debt down to 20 percent of GDP and keep the budget in surplus across the economic cycle.

This fiscal straightjacket has been criticised by those who want the Government to launch into significant (and expensive) tax, benefit and social reforms.

Hickey (Newsroom):  ‘Let’s do this’ in a holding pattern

Jacinda Ardern’s first big economic speech of the year warned of global economic headwinds, but it lacked action in response, or a major plan to improve wellbeing. Instead, it exposed how her Government is stuck in a fiscal holding pattern before the 2020 election, when it hopes it can throw off its debt target and capital gains tax shackles.

The breakfast speech to a polite audience of Auckland’s business elite at the Hilton Hotel on the waterfront showed the Prime Minister at the top of her game. She is a smooth operator with a knack for a self-deprecating quip or an aside that can win over even the most sceptical audience.

“Our starting point for the Wellbeing Budget is that while economic growth is important, it alone does not guarantee improvements to New Zealanders’ living standards,” she said, going on to make a strong case to address our obvious wellbeing problems.

“An everyday New Zealander – hearing of the “rock star economy” while their housing costs are skyrocketing, or they can’t afford to send their kids to school with a proper lunch or their mental health is strained – tends to have their faith in the system and in institutions undermined.”

She went on to detail the plans and the priorities for the first Wellbeing Budget in May, and suggested it would help New Zealand cope with economic headwinds from overseas.

“It will ensure that those closest to the margins are protected and that no one is left behind,” she said.


How can that be true when Kiwibuild is behind schedule and there are massive infrastructure deficits in housing, health, education and transport, which can only be addressed with tens of billions of extra public investment. New Zealand’s population is growing five times faster than the OECD average and Ardern acknowledged in her speech that governments had encouraged population growth without investing in infrastructure to deal with it.

That’s what National had been criticised for (with some justification).

I asked Ardern afterwards if the Government was planning to respond to the slowing economy and higher unemployment by loosening fiscal policy with extra operational or investment spending.

She stuck to the usual line that the Government would keep operating within its Budget Responsibility Rules.

Ardern and right-hand-man and now-Finance Minister Grant Robertson agreed with Green Leader James Shaw shortly after her election as Labour leader to essentially sign up to the same fiscal settings as National had up until earlier that year.

They imposed those rules on themselves to stick with a campaign promise, made to promote Labour as fiscally responsible to combat attempts by National to portray them as loose with money.

Ardern and Robertson are playing a longer game here, but that is frustrating those who want rapid and meaningful reforms.

The only exception to this rule is the need to spend up large to cope with either natural or man-made financial disasters such as the Global Financial Crisis and the Christchurch earthquakes.

The irony is they need a new global financial crisis to give them the excuse to do what they need to do to make a real improvement in wellbeing.

So should the Government use its strong balance sheet to fix New Zealand’s massive infrastructure deficits? Yes should be the answer, but the timing should be now, not in two years time.

Unwilling to break its promise, it is now in a holding pattern and hopes voters keep the faith for long enough to give it a chance to throw off the shackles.

The Government has already committed to some extra spending – they boosted the Families Package, rushed in a tertiary education fees policy, and gave NZ First a $3 billion Provincial Growth Fund kitty. They will also end up with significant increases in teacher and nurse wage bills.

There are pressures to address what Labour had claimed was underfunding in health, but there seems to be no urgency there. They are now seem to be kicking the ‘mental health crisis’ down nine separate working group roads (see Mental health crisis -> 1 working group -> 9 working groups), and have stretched out their promised rebuild of the Dunedin Hospital (now due for completion in ten years).

Ardern has promised big in this year’s ‘wellbeing’ focussed budget, but has also promised small in debt targets, so Grant Robertson will have quite a balancing act to do.

Hickey sees this as a virtual holding pattern for the next two budgets, unless the world economy turns to custard and gives them an out clause.


Hickey critical of Ardern’s economy confidence elephant

Bernard Hickey’s analysis of Jacinda Ardern’s long promised big business confidence speech is quite critical.

Newsroom Analysis: Side-stepping the elephant in the room

Jacinda Ardern called it the Government’s “elephant in the room” just before she went on maternity leave. Upon her return, she said would address it directly in a major speech aimed at turning it around.

Tuesday’s speech was supposed to deal with it head-on and convince business leaders that the Government understood the problem, had listened, and was changing its plans to help.

Instead, those business leaders got a pep talk and an explanation of an existing plan, which they already knew. The key problems remain of an infrastructure deficit caused by a population shock, uncertainty over migration settings, the minimum wage surge and the ban on new oil and gas.

Ardern’s announcement of a business advisory group and a limit to the number of fair pay agreements did little to address those concerns.

Ardern failed to distinguish between the wider business confidence figure, which is politically biased and economic irrelevant, and the own activity measures of confidence, which are also down sharply and much more closely aligned with GDP growth. The Government rightly dismissed the slump in headline business confidence as a politically-biased measure of business leaders’ disappointment at the change of Government.

But the slide in own activity confidence through the June quarter could not be as easily dismissed, and Ardern failed in the speech to acknowledge that.

Instead, she chose to frame the own activity fall as a judgment about certainty, rather than confidence.

She didn’t address the business community’s shock over the coalition’s immediate and irrevocable decision to lift the minimum wage by more than a third in three years and its shock over the ban on new oil and gas drilling permits offshore.

Again side-stepping responsibility, Ardern said the economy faced a number of challenges which were global in nature.

Hickey provides quotes from her speech to support his criticism.

He challenges her ‘transformation narrative’.

The changes to taxing capital and wealth are yet to be proposed or agreed to by voters. The modern transport infrastructure she referred is subject to the legislative timetables for the Urban Development Authority, infrastructure bonds and the infrastructure funding whims of the Auckland Council. Much of it remains uncertain and distant.

The addition of the vaguely phrased “contributing to supporting maximum sustainable employment” line in the Reserve Bank’s Policy Targets Agreement has changed nothing.

He says Ardern concluded that New Zealand had a positive future despite the ‘giant flashing sign with fireworks’ of low business confidence.

“We are promoting change because without change our businesses and our economy are at risk. But change does not need to breed uncertainty, not when instead it can breed opportunity,” she said.

“I have confidence that our relationship will thrive, that our agenda will successfully tackle the challenges we face, and that our shared achievements for the country will leave a lasting legacy future generations will thank us for.

“Now let’s get on with it.”

Her concluding comments showed she believed business leaders needed simply to listen more closely to the Government, get more involved and ‘buck their ideas up’ about the positives in the economy.

It was more of a pep talk than a new plan or an acknowledgement that business owners had legitimate concerns.

Ardern is growing a reputation for pep talks and platitudes. She sounded confident in giving her business confidence speech, but I think the people in business will be looking for more substance.

This was a well signalled opportunity for Ardern to win the confidence of business leaders, and business people in general.  She will need to do more, and better, to earn confidence in her and her Government’s ability to work well alongside the business community.


Hickey’s housing slant

The official description of ‘Bernard Hickey’s Opinion’ column says that  ‘Bernard is an economics columnist for the NZ Herald’.

In his column today, Use that power, renters, Hickey has strong words about Auckland’s housing problems

Finally, Auckland’s Generation Rent has found someone who is talking about the elephant in the room – rampant speculative demand for housing by landlords.

Everyone worried about Auckland’s astonishing house prices should read Reserve Bank deputy governor Grant Spencer’s speech.

He spelt out in the plainest language yet that property investors are taking advantage of tax incentives to use cheap debt to buy as many houses as they can.

The Reserve Bank has exhausted its toolkit, having put up interest rates and set limits on high loan-to-value ratio (LVR) lending. It is looking to increase capital requirements for landlords’ mortgages, but it knows it’s not enough.

Exasperated, the Reserve Bank has asked for help to control the risks to New Zealand’s banking system, which relies on house values to back 60 per cent of its loans.

Spencer called for the Government to revisit the tax incentives for landlords.

Fair enough listening to and quoting the Reserve Bank Governor.

The Government’s top economic adviser has said landlords’ tax incentives should be reduced and central Auckland apartments should be built in defiance of the Nimbys controlling Auckland politics.

Council and Government politicians are refusing to take that advice.

What I find interesting about this is the apparent one-sidedness of Hickey’s column. It seems that he has used the Reserve Bank Governor to support a hobby horse.

Now this column may have been written before yesterday morning.

But at 9 am yesterday Hickey participated on a Twitter discussion for The Nation about their interview with Treasury Secretary Gabriel Makhlouf who has different views on housing than the Reserve Bank Governor.

Join our Twitter panel and at now!

Those alternatives weren’t mentioned at all in Hickey’s column – and he should have been well aware of them before listening to the Makhlouf interview.

On the panel Hickey displayed what looked like a pre-decided slant. He has a clear preference to Reserve Bank advice to Treasury Advice.

Here’s another view on China for ‘s Gabs Makhlouf to read after

He tries to educate Makhlouf on his angle.

Big gap there between @nztreasury & @ReserveBankofNZ. Gabs Makhlouf sceptical about CGT just 3 days after bank called for debate.

But Hickey doesn’t seem \want debate, he wants to promote his views which happen to side with the Reserve Bank advice.

Got a feeling the @ReserveBankofNZ would have liked a bit more support from @nztreasury on housing taxation than that.

Ok, he has ‘a feeling’ he and the reserve Bank are right.

In Muldoon era it was the @nztreasury offering the freest and frankest and most critical advice. Now it’s the @ReserveBankofNZ

Is that because it’s the freest and frankest? Or because it’s ‘most critical advice’ that happens to fit his opinion?

For #nationTV3 viewers wanting an alternative housing view, here’s the speech from @ReserveBankofNZ’s Grant Spencer http://www.rbnz.govt.nz/research_and_publications/speeches/2015/action-needed-to-reduce-housing-imbalances.html … …

Diverting viewers to something he prefers to the Nation interview.

Another example here of how NZ’s leaders today are pushing the costs of current consumption onto their kids/grandkids http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11433784

He’s not discussing the Makhlouf interview at all, he dismissed it and is linking to alternatives he agrees with.

Counter-factual for a CGT is what happened to Auckland house prices post-election after buyers realised no CGT. Up 20%

Has Hickey got any evidence supporting that ‘counter-factual ‘? House prices almost certainly didn’t go up 20% solely because the election result meant no wider Capital Gains Tax. Did it have any effect at all?

Unless Hickey can produce facts I will remain very dubious about that claim.

And I’m very disappointed he simply dismissed Makhlouf  and made no attempt to lead any discussion. In his The Nation panel tweets and in his Herald column he looks more like an economic activist than a balanced economic columnist.

We could print money, but can’t print markets

In a post on interest.co.nz

Bernard Hickey wonders why New Zealand is not printing money and thinks we are being severely disadvantaged by not following the crowd.

The New Zealand dollar seems set to rise towards US$1 if the current trends continue.

He then went on to explain what is happening around the world, including:

  • The US Federal Reserve announced an essentially unlimited plan for money printing on Friday morning.
  • Economists are now expecting the Reserve Bank of Australia will cut its interest rates through 2013.
  • This month the European Central Bank unveiled its own programme of unlimited bond buying.
  • The Bank of Japan, which has been printing and stimulating with 0% interest rates for almost 20 years, is considering fresh money printing to try to drag its yen lower.
  • The Swiss National Bank has been printing francs in unlimited fashion for months to cap a rise in its currency against the euro.
  • The People’s Bank of China is also on the verge of its own fresh stimulus.

In the meantime New Zealand doesn’t even fiddle while the world’s economies burn money like it’s going out of fashion.

Yet we are standing aside from this giant game of musical chairs and scratching our chins, wondering why the world is so unfair. We point to the skies and say there is nothing we can do about this bad economic weather.

Outgoing Reserve Bank Governor Alan Bollard reiterated in his valedictory news conference and parliamentary appearance that there was nothing New Zealand could do about these acts of economic gods.

And our manufacturing sector shows signs of more strain.

All this chin-scratching and finger waving in the air is having very real world consequences. In recent weeks we have seen hundreds of job losses at Tiwai Point, Spring Creek, Huntly, Kawerau and at a fish processing plant in Tauranga. The Reserve Bank’s own Monetary Policy Report noted a slump in manufacturing, particularly the import-competing type in the last year.

I guess we could print more money.

But we can’t print more aluminium, coal or newsprint markets. I put that to Bernard on Twitter (where he was discussing the issue with Fran O’Sullivan).

As yet he hasn’t responded.