Reforming public finance beyond the ‘wellbeing budget’

The Government has been consulting with ‘a group of experts’ – including Michael Cullen – on a new approach to managing the government’s finances, which could have a massive impact on future budgets.

Newsroom:  Cullen consults on massive Budget shake up

Treasury has brought in former Finance Minister Michael Cullen to consult on government budgeting as it tries to shift the focus away from surpluses

Dubbed a “stewardship” approach, it aims to take a more long-term view of public finance. A paper released to Newsroom under the Official Information Act shows Treasury has already begun work on reforming the public finance beyond the ‘Wellbeing Budget’ which will be delivered on Thursday.

The briefing notes that the current public finance system is 30 years old and may not adequately serve the needs of today’s governments. It said that the current work on the Wellbeing Budget and the Living Standards Framework will “only take us so far”, and further work was needed to fix “underlying issues with our public finance settings”.

Treasury says the approach is about moving from a “management” to a “system stewardship” approach to the public finance system. This could involve further changes to the Public Finance Act, a piece of legislation drawn up in 1989 that forms the cornerstone of public finance in New Zealand.

Finance Minister Grant Robertson told Newsroom the Government was “certainly moving forward” with the ideas in the paper.

Treasury believes the public sector is “not working well for everyone”. It singles out struggles in responding to “complex needs and issues” as well as “longer-term opportunities and risks”. It lays the blame, in part, on “a range of underlying issues with our public finance settings”.

It says the current settings encourage “silos” and a short-term focus. These settings mean it can be difficult to move funding across several years when it makes sense.

The reporting requirements placed on the Government focus on “outputs not outcomes,” and it incentivises “compliance and risk aversion,” rather than “innovation”.

Treasury said the new approach would “support better collaboration”, and place “more emphasis on the long-term to support innovation, asset management and capacity-building”.

One change being discussed would substantially alter how baseline funding is appropriated. Currently, bids for cost pressure funding is bid for on an annual basis, which Treasury says is “resource intensive”. This could change to a multi-year “defined period” bid, which would be more flexible.

Government budgets should have medium and long term considerations. I don’t think this is particularly new – the Cullen Fund was designed as a long term  means of financing superannuation as the population grew older. And many budget items are for multiple years (four years is common).

Last September, Treasury officials met informally with a panel which included former Finance Minister Michael Cullen, former ACT candidate and ex-Treasury Secretary Graham Scott, Victoria University Professor Jonathan Boston, and former State Services Commissioner Iain Rennie.

The group urged caution before changing “what is internationally a very good public finance system”.

Speaking to Newsroom, Cullen said there was merit in looking at long-term risks so long as a balanced approach was taken.

“So long as focus on the long-term doesn’t become an excuse for doing stupid things in the short-term then there’s a great deal of sense in getting that long-term focus,” Cullen said.

He said long-term risks like the costs of super and health care, combined with unexpected risks like earthquakes meant a prudent approach should still be taken.

“We are a country which faces quite significant risks that will suddenly descend upon us. We don’t have the slightest clue they’re going to happen,” he said.

Jonathan Boston told Newsroom that moving away from a narrow focus on GDP as a measure of the economy was wise.

“GDP is a flow measure; it measures the value of goods and services but it doesn’t tell you what’s happening to income distribution and to other financial measures, more particularly it doesn’t tell you what’s happening to the stocks of capital in a society or your human capital stock,” Boston said.

Reassessing how budgeting is done is a good thing. We will have to wait and see whether changes that happen as a result of this consultation turn out to be a good thing – and that could take many years to determine.

 

National – “Robertson concedes defeat on budget rules”

National’s finance spokesperson Amy Adams has responded to Minister of Finance Grant Robertson’s announcement yesterday that the Government core debt target would change to a range (see Grant Robertson: shift from net debt 20% target to 15-25% range).


Robertson concedes defeat on budget rules

Finance Minister Grant Robertson has today thrown in the towel by scrapping his self-imposed debt target, National’s Finance Spokesperson Amy Adams says.

“Grant Robertson has been backed into a corner by allowing the economy to slow, over promising and making poor spending choices. Now, instead of a fixed target Grant Robertson has lifted the debt limit by 5 per cent. That loosens the purse strings by tens of billions of dollars.

“This is a blunt admission the Government can’t manage the books properly, it is not wriggle-room. This makes the fiscal hole look like a puddle.

“You can almost guarantee that means debt at the upper end of the range of 25 per cent. This is an admission of defeat from a Finance Minister who has repeatedly used these rules to give himself the appearance of being fiscally responsible.

“This decision will mean billions of dollars more debt because the Government can’t manage the books properly and wants to spend up on big wasteful promises in election year.

“This will pay for things like Shane Jones’ slush fund, fees-free tertiary and KiwiBuild – in other words, it’s wasteful spending.

“Debt isn’t free. It will have to be paid for by higher taxes in the future.

“The debt target is the latest broken promise by the Government as the ‘year of delivery’ continues to be an embarrassing string of failures.

“It took the last Labour Government two terms to lose its fiscal discipline. This Government has given up in 18 months. This confirms you simply can’t trust Labour with the economy.”

Grant Robertson: shift from net debt 20% target to 15-25% range

One of the biggest talking points coming out of Minister of Finance Grant Robertson’s pre-budget speech to Craigs Investors Conference yesterday was a shift from a net debt target of 20%, to a much more flexible range of 15-25% dependent on economic conditions.

The 20% target was a feature of the Labour-Green fiscal responsibility agreement prior to the 2017 election.

Robertson 24 March 2017: Labour and Greens commit to rules for responsible financial management

The Labour Party and the Green Party have agreed to Budget Responsibility Rules, which will provide the foundation for sound fiscal management after the election.

“New Zealanders rightly demand of their government that they carefully and effectively manage public finances. We understand that and are committed to delivering this,” says Labour Finance Spokesperson Grant Robertson.

“These rules demonstrate how Labour and the Greens in Government will manage the economy prudently, effectively and sustainably.”

Under the Budget Responsibility Rules the Government will:
• Deliver a sustainable operating surplus across an economic cycle
• Reduce the level of Net Core Crown Debt to 20 per cent of GDP within five years of taking office
• Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand
• Maintain its expenditure to within the recent historical range of spending to GDP ratio
• Ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

The Government will establish an independent body to make sure the rules are being adhered to.

Since the Labour-Green-NZ First Government took over in late 2017 the target (and fiscal prudence) has been strongly criticised by people on the left who have been demanding much more spending for ‘urgent needs’.

Relevant section of yesterdays speech under Budget 2019 Economic Priorities – Fiscal sustainability:


We are reducing the level of net core Crown debt to 20 percent of GDP within five years of taking office. New Zealand has low levels of Government debt by international standards, but we remain vulnerable to shocks that are beyond our control, such as earthquakes and other natural disasters. We have made our commitment to keeping debt under control to ensure that future generations of New Zealanders are in a position to be able to respond effectively to any such shock.

This Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. This is apparent in the intergenerational wellbeing priorities we have identified in this year’s budget and restarting contributions to the NZ superfund and our focus on issues such as climate change.

We will maintain Government expenditure within the recent historical range of spending to GDP, which has averaged around 30 percent over the past 20 years. We are also focussed on the quality of spending, with Ministers running prioritisation exercises across their portfolios to identify spending that doesn’t fit with the Coalition Government’s priorities.

I am pleased to announce today that on the 30th of May the Budget will show that we are meeting these rules again, as we did in last year’s budget.

I know there has been some criticism of this approach – particularly around the debt target. For me it is a question of balance. We have made, and will continue to make, significant investments in our future, but we also know that the volatility of the world, be it economically or through natural disasters, biosecurity incursions or unexpected events, is never far away.

The Public Finance Act obliges Governments to outline their long-term fiscal strategies at Budget time. One of the key elements of this is the Government’s approach to debt.

People in this room will all have different views on what it could or should be. That in part depends on the levels of investment you believe the Government should be making and in what areas.

We also have to take into account capacity constraints at any point in time – like in our construction sector. With this in mind, I am comfortable with the 20% point that we have been targeting. But circumstances can obviously change.

Beyond the Budget Responsibility Rules, our fiscal intentions in this budget will signal a shift to a net debt percentage range, rather than a single figure. At this point we are looking at a range of 15-25% of GDP, based on advice from the Treasury. This range is consistent with the Public Finance Act’s requirement for fiscal prudence, but takes into account the need for the Government to be flexible so that it can respond to economic conditions.

Essentially, our current 20% target falls in the middle of the new range that will exist from 2021/22 onwards.

A range gives governments more capacity to take well-considered actions appropriate to the nation’s circumstances – circumstances that change over time. It establishes boundaries within which debt is kept to sensible and sustainable levels and where fiscal choices are driven by impact and value.

For example, a government may choose to move higher up the debt range to combat the impact of an economic recession, or where there are high value investments that will drive future economic dividends. At other times it may be prudent to reduce debt levels to the lower end of the range to provide headroom for future policy responses.

Grant Robertson: Budget 2019 Economic Priorities

Minister of Finance Grant Robertson outlined economic priorities for the 2019 budget, due next week, in a speech to the Craigs Investors Conference yesterday.

He is pushing the ‘wellbeing’ focus, mentioning it 15 times in his speech overall.


Budget 2019 Economic Priorities

In next week’s budget you will see investments to support our economic strategy.

This year’s Budget is different. There are three fundamental elements to the Wellbeing Budget.

First, a whole-of-government approach. This is about stepping out of the silos of agencies and working together to assess, develop and implement initiatives to improve wellbeing.

Secondly, a wellbeing approach means looking at intergenerational outcomes. We have to focus on the long-term thinking about the impacts of policy on future generations as well as thinking about meeting the needs of the present.

Thirdly, we need to move beyond narrow measures of success. This can be seen through the development of the Living Standards Framework Dashboard and from the Indicators Aotearoa New Zealand work led by Statistics New Zealand.

We have developed our Budget priorities on the basis of a wellbeing analysis. We looked at the evidence and got expert advice to assess where we have the greatest opportunities to make a difference to New Zealanders’ wellbeing. We have focused our efforts on those opportunities.

This approach has led to some significant and different programmes, like the $320 million investment announced last weekend to address domestic and sexual violence. This is the wellbeing approach in action. The evidence shows the long-term impact that domestic violence has, especially on children. We are taking a joined-up government response to start addressing this long term challenge. We have brought together eight government agencies, working with the community to take on this scourge that has such massive social and economic consequences.

From an economic perspective, our wellbeing analysis showed that we have some way to go in achieving our vision of a productive, sustainable and inclusive economy.

Productivity growth is a key driver of incomes both at a household and country level. Despite working longer hours on average than workers in many developed countries, New Zealanders’ incomes have for some time remains in the bottom half of the OECD.

In addition, the Government has set ambitious greenhouse gas reduction targets to meet the 2015 Paris Agreement goal of keeping temperature rise to no more than 1.5 degrees.

As a result, two of the priorities in this year’s budget are:

• Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy; and

• Supporting a thriving nation in the digital age through innovation, social and economic opportunities.

Come Budget day you will see targeted investments in these areas to support more productive, sustainable and inclusive economic growth.

Fiscal sustainability

Of course, fiscal sustainability is an inherent part of maintaining and improving intergenerational wellbeing and a sustainable economy.

That’s why this Government made a commitment to our Budget Responsibility Rules when we came into office.

These include:

Delivering a sustainable operating surplus across the economic cycle. The key word here is sustainable.

That means our surpluses will exist after we have funded our policy objectives, so that issues are not kicked further down the road for the next government or generation to deal with, as I discovered after coming into my role as Finance Minister.

We are, reducing the level of net core Crown debt to 20 percent of GDP within five years of taking office. New Zealand has low levels of Government debt by international standards, but we remain vulnerable to shocks that are beyond our control, such as earthquakes and other natural disasters. We have made our commitment to keeping debt under control to ensure that future generations of New Zealanders are in a position to be able to respond effectively to any such shock.

Thirdly, this Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. This is apparent in the intergenerational wellbeing priorities we have identified in this year’s budget and restarting contributions to the NZ superfund and our focus on issues such as climate change.

Fourthly, we will maintain Government expenditure within the recent historical range of spending to GDP, which has averaged around 30 percent over the past 20 years. We are also focussed on the quality of spending, with Ministers running prioritisation exercises across their portfolios to identify spending that doesn’t fit with the Coalition Government’s priorities.

I am pleased to announce today that on the 30th of May the Budget will show that we are meeting these rules again, as we did in last year’s budget.

Our Budget Priorities are focussed on the outcomes New Zealanders want to achieve and all Ministers and agencies will be collectively accountable for delivering them. And in their delivery, this Government will follow a disciplined fiscal strategy. The strategy gives the balance to be both a responsible manager of public finances and responsive to New Zealand’s intergenerational wellbeing needs.

We’ve prioritised spending that improves the wellbeing of all New Zealanders. This means tackling the big long-term issues, by investing in an economy that is more productive, sustainable and inclusive.

Come Budget day you will be able to see that this is not simply the same old Budget repackaged with softer edges and brighter colours. You will see a Budget that is new, with a more structured approach and a new, explicit emphasis on what we want to achieve for the long term for our country.

 

Fees-free policy “not a failure” but students threaten backlash

The Government has gotten themselves into a tricky situation with their handling of the news that their tertiary education fees-free scheme has run well under budget.

The scheme was rushed into place as soon as Labour took over the Government in late 2017.

Criticism has stung the government who are quite defensive.

RNZ:  Fees-free tertiary policy not a failure, Grant Robertson says

The Finance Minister insists the fees-free tertiary policy is not a failure, despite reallocating a sizeable part of the funding to polytechs due to low demand.

The policy – a Labour Party campaign promise – has been in place since the start of 2018 and pays for the first year of full-time study for school leavers, and for those who have done fewer than six months’ tertiary study in the past.

Initial estimates were it would cost about $350 million a year, but now about $197m (over four years) will be rediverted due to fewer students taking advantage of the policy than expected.

The government budgeted for 80,000 students when it first launched the policy, but that was revised down to 50,000 once it became apparent the uptake wouldn’t be that high.

In a pre-Budget speech to the Wellington Chamber of Commerce, Finance Minister Grant Robertson said ministers had identified about $1 billion of spending that was no longer a priority.

“One example of this was underspending on the fees-free programme due to enrolments not meeting initial forecasts. This funding … is now to be redirected to the implementation of the reform of vocational education.”

He told reporters afterwards it was “far from” an admission of failure.

“Tens of thousands of New Zealanders have benefited from this scheme, this is simply a recognition that not all of the money that was allocated for it is being used.

“And now we’ve got the opportunity to put that towards a vocational education system that’s delivering people with the skills that they need.”

But the government could have done better communicating who was eligible for a year’s fees-free, said Mr Robertson.

They could also have done a better job communicating the under-performance. They have left themselves trying to defend after the news came out.

And diverting the funds rather than communicating better to prospective students may also be a problem.

RNZ: Coalition faces ‘student backlash’ if no-fee policy revised

A student leader says many students are only at her university because of the new no-fees scheme and has warned the government not to ditch its policy.

Victoria University Students Association president Tamatha Paul warned the Labour coalition not to backtrack on its 2017 election promises to implement the scheme, or face a backlash by students.

Under the scheme, the first year of full-time study for school leavers is paid for, and those who have committed fewer than six months’ tertiary study in the past also qualify.

Labour’s campaign policy in 2017 was to introduce fees-free at the start of 2018, then gradually extend it to two years’ free in 2021 and provide three years’ free in 2024.

Ms Paul told Morning Report the scheme was proving beneficial to students.

“We know that this policy is being extremely helpful,” she said.

“We’re having conversations with students consistently, who are saying they wouldn’t have come to the university if it wasn’t for this policy, especially students coming from disadvantaged backgrounds and especially those getting scholarships who are now dedicated that money towards accommodation and living costs, instead of tertiary fees.”

So some skilful communications may be in order here.

 

 

Low uptake on fees-free scheme, could be scaled back

In 2017 Labour campaigned on there being a number of crises that needed urgent attention after ‘nine years of neglect’. It was surprising that one of the first policies they piled money into was something that seemed less urgent than housing, homelessness, poverty, mental health – they rushed in a tertiary education free fees scheme so that it would be in place by the start of 2018.

It turns out that the uptake hasn’t been anywhere near as high as predicted, so the scheme won’t cost as much as was budgeted. But the Government also seems to be considering scaling back the scheme to divert  budgeted money to more urgent needs (the so-called crises remain largely unaddressed).

Stuff:  Low enrolments sees $200m clawed back from fees-free scheme

The Government is stripping nearly $200 million from its controversial fees-free policy, after the number of people taking up the offer of a year of free tertiary education was below expectations.

Although he denied disappointment with the policy, Finance Minister Grant Robertson appeared to leave the door open to cancelling an extension of the scheme to further years of free education in 2021.

At a speech to the Wellington Chamber of Commerce in Parliament on Tuesday, Robertson said that as part of the upcoming Budget, the Government had identified around $1 billion of the lowest priority initiatives to cancel.

As part of this, $197m allocated for a year of tertiary education was being redirected to changes being made in the vocational education reforms.

Of course if they don’t have to spend everything the budgeted for for fees-free that money will be able to be used elsewhere (if they don’t want to cut government expenditure).

But what is apparent here is that a scheme rushed through as a high priority in 2017 now seems to be regarded as ‘lowest priority’.

Robertson denied the move was an acknowledgement of problems with the policy. The policy assumed a significant uplift in enrolments, which had not materialised. Robertson put this down to the strong labour market which made job opportunities good.

“When you get a period of time when you have employment being very, very low, that traditionally coincides with lower enrolments, in particular in polytechs,” Robertson told reporters, adding that people still had the option of taking up the policy if they chose.

Robertson maintained that it still remained Labour Party policy to extend the scheme for a second and eventually a third year of free education, but appeared to open the door to that happening.

“We’ll take a look at the extensions nearer the time, but I still believe the principle of making sure that people can carry on with study at university or apprenticeships  or work place training is really, really important.”

The plan for a second year of free education did not take place until the next term of Government so there was “plenty of time between now and then to make that call”.

So Robertson certainly seems uncommitted to expanding the scheme as planned.

Robertson’s pre-budget speech to the Wellington Chamber of Commerce:  Wellbeing Budget to tackle long-term challenges

Robertson ‘surprised’ by reaction to CGT capitulation – yeah, right

Minister of Finance Grant Robertson has belatedly tried to defend the decision of Cabinet to drop any plans for a Capital Gains Tax, and the decision of Jacinda Ardern to rule out trying to bring in a CGT at any time under her leadership.

A CGT had been a prominent Labour Party policy, and was the main focus of the Tax Working Group led by ex-Labour Finance Minister, Michael Cullen.

It has been justifiably been noted that Ardern and Robertson did little to promote or sell the CGT after the release of the Working Group recommendations.

NZ Herald: Finance Minister Grant Robertson leaps to defence of PM Jacinda Ardern over Capital Gains Tax ‘leadership’ claims

Finance Minister Grant Robertson said he was surprised that the capital gains tax decision was getting such a strong reaction and he said claims that Prime Minister Jacinda Ardern had shown a lack of leadership over it was “ridiculous.”

“I’m not surprised that there are people who feel strongly about the importance of getting better balance back into the tax system.”

He understood they were disappointed, as he was.

“What I am a bit surprised about the extent to which people are defining the Government by this decision when I believe we have done a lot to be proud of in terms of making New Zealand a fairer and better place, including within the tax system by closing GST loopholes, extending the brightline test and ring-fencing of rental income losses.

Ardern and Labour have been blasted by people on the left who had been sold the idea that a CGT was a significant policy that would help create ‘a fairer and better place’.

“I feel that we have done a lot that is progressive and important, so I am a little bit surprised by that reaction,” Robertson told the Herald.

Robertson shouldn’t be surprised (and I doubt that he is surprised much if at all).

“It would have represented a shift at the core of our tax system so I understand why people see it as significant but there are other ways of achieving fairness and that is what we are focused on.”

Are they focussed on standing up to or sidelining Winston Peters?  If they want to deliver the sort of ‘fairness’ and transformation that Ardern has sold the political left then they should be dealing with their biggest problem.

“In the end, we cannot beat the maths of the Government and that’s the reality of where we are.

Robertson and Ardern and Labour were there as soon as they formed a coalition government with NZ First in 2017. But they have strung everyone along with their Tax Working Group for fifteen months. They can’t have only just worked out the maths of their Government.

“The Prime Minister has shown immense leadership over recent months on a number of topics. It’s just on this particular issue, the Coalition couldn’t find consensus.”

It’s not just on this particular issue, but it is a significant failure for Labour.

Robertson said the Labour Party’s New Zealand Council were consulted about taking the policy off the table.

“I’m sure many of the New Zealand Council were disappointed in the same way I was that we couldn’t get it over the line this time,” said Robertson. “But they were certainly consulted and were part of this decision.”

A part of the decision? It’s hard to see this involving any more than being told that Winston said NO. Perhaps the Labour Council was a part of Ardern’s decision to rule out any CGT under her leadership in the future – but what about the Labour members who thought that CGT was a big thing?

“There will be plenty of ideas inside the party around how we can create the fairest possible tax system. It’s just it won’t include a capital gains tax.”

“The fairest possible tax system”, minus whatever NZ First don’t agree with. But more than that, minus any possible future CGT, with a good chance NZ First won’t be around to stop it.

“I know most members of the Labour Party understand the importance of being able to be in Government and make change and every now and then there will be something we don’t do that we would like to do but we are achieving a lot alongside that.”

What a lot of unconvincing waffle.

Robertson was largely silent when the CGT needed to be promoted. This is far too late and too unconvincing.  This just reinforces the suggestion that he and Ardern had given up on getting a CGT long ago, probably as soon as they signed the coalition agreement with NZ First.

I’ll ask again whether this was a done deal in the coalition document that Labour have refused to make public.

Government response to the Tax Working Group recommendations

Most of the attention on the Government response to the recommendations from the Tax Working Group report was on the scrapping of plans for any new type of Capital Gains Tax. See CGT backdown, everyone claims victory.

But the report also covered a number of other tax changes.

Beehive:  Govt responds to Tax Working Group report

The Coalition Government today released its response to the recommendations of the independent Tax Working Group report.

The report found that on the whole New Zealand’s tax system was working well, but made a number of recommendations to improve fairness, balance and structure.

The Government is not adopting any of the recommendations on capital gains taxation and has agreed no further work is necessary on that aspect of the report.

Winston Peters said no, so Labour and the Greens agreed that their CGT plans were stuffed.

“The final report covered all aspects of the tax system, and a number of the recommendations will now be considered for inclusion in the Government’s Tax Policy Work Programme,” Grant Robertson said.

“That includes exploring options for targeting land speculation and land banking.

“We intend to direct the Productivity Commission to include vacant land taxes within its inquiry into local government funding and financing,” Grant Robertson said.

Exploring options? I thought that’s what the TWG was supposed to have done.  But now they are going on to exploring more and doing another inquiry. Given the supposed purpose of the TWG, this sounds like further kicking of the tax can down a dusty potholed road.

“Officials have been directed to prioritise work on the TWG’s recommendations on ways to encourage investment in significant infrastructure projects and improve the integrity of the tax system to crack down on tax dodgers,” Stuart Nash said.

A refreshed tax policy work programme will be released mid-year.

So yesterday they announced what they plan on announcing later in the year.

The Coalition Government reiterated it will not introduce resource rentals for water or a fertiliser tax in this term of Parliament.

Another Peters veto of Labour and Green plans?

Other priorities for the Government this year include progressing legislation for research and development tax incentives; GST on low-value goods from offshore suppliers; a discussion document on a digital services tax, and further work to ensure multinationals pay their fair share of tax.

On to a discussion document and further work on things that have been talked about for years.

Summary of the Government’s responses to the recommendations

In that summary there are a number of TWG recommendations flagged as “Endorse the TWG recommendation” – in just about every case the recommendation is not to change anything.

There are several recommendations flagged as “Consider as a high priority for work programme”, meaning no decision has been made on what to do.

What was this Government response for? It has done little but admit they were abandoning any CGT plans indefinitely.

Growing warnings about world economic outlook

In general the world economy has recovered and prospered since the Global Financial Crisis of 2007-2008, but there are growing warnings that the bubble might at least slow down. There is always a risk of it bursting.

International Monetary Fund:  World Economic Outlook, April 2019 Growth Slowdown, Precarious Recovery

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies.

China’s growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States.

The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened.

Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand.

Conditions have eased in 2019 as the US Federal Reserve signalled a more accommodative monetary policy stance and markets became more optimistic about a US–China trade deal, but they remain slightly more restrictive than in the fall.

Greg Jericho (Guardian Australia): The outlook for the global economy goes from bright to precarious

At the start of last year things were looking almost upbeat. The title of the IMF’s January update, Brighter Prospects, Optimistic Markets, Challenges Ahead, is economic speak for “cripes, aren’t we all a bit unusually happy!”. By April 2018 the title had become “Cyclical Upswing, Structural Change”, which again spoke of economic sunshine, even if it did warn of the need to adjust to the post-GFC world.

By the middle of last year the July update was warning “Less Even Expansion, Rising Trade Tensions”, and the October outlook was a decidedly measured if still somewhat neutral, “Challenges to Steady Growth”.

But with this new year, all neutrality has disappeared. The January update stated it plain: “A Weakening Global Expansion”. And just in case you had not caught their drift, the latest outlook, released this week, was headed, “Growth Slowdown, Precarious Recovery

From brighter prospect to precarious recovery in less than two years. Hope you enjoyed that moment of economic joy while it lasted.

The decline is across roughly 70% of the world’s economies, with the IMF blaming the “escalation of US–China trade tensions”, troubles in the “auto sector in Germany” plus “tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies.”

In effect the structural changes and rising trade tensions warned in previous outlooks all came to pass.

Financial Times:  US consumer sentiment misses view as economic outlook softens

US consumer sentiment dipped in April as consumers’ economic outlook weakened and as they thought “stimulative impact” of the tax overhaul “has run its course”.

The University of Michigan’s preliminary consumer sentiment survey slid to 96.9 in April, from 98.4 the previous month. That missed analysts’ expectations for a drop to 98, according to a Thomson Reuters survey of economists.

Despite the modest decline, sentiment over the past 30 months remains higher than any other time since the 1997-2000 US economic expansion, as consumer confidence “continued its sideways shuffle in early April”, the report noted.

The report also showed the impact of the 2018 US tax overhaul on consumer sentiment has “all but disappeared”. The decline in consumer confidence follows the best first quarter for the S&P 500 in 21 years but comes amid uncertainty about the US economic outlook. The report showed the index of consumer expectations about the future fell to 85.8 — its lowest level in more than a year — from 88.8 the previous month.

Officials at the Federal Reserve have outlined “significant uncertainties” over the US and global economic outlook, according to the minutes of the central bank’s latest meeting, with some officials stressing their outlook could “shift in either direction”.

The Newyorker: The High-Stakes Battle Between Donald Trump and the Federal Reserve

For months now, Trump has been publicly railing against the Fed. In private, Bloomberg reported, he has been asking his aides if he can fire Powell, a sixty-six-year-old Republican banker who was confirmed at the start of last year. (According to legal experts, the question is a murky one.) On Friday, Trump again defied the convention that the President stays out of monetary policy, calling on Powell and his colleagues to cut interest rates in order to boost the economy.

Referring to the rate hikes that the Fed introduced last year, which were the source of his animus toward Powell, Trump said, “I think they really slowed us down.” Trump’s senior economic adviser in the White House, Larry Kudlow, has also called for a rate cut.

In addition to jawboning the Fed, Trump has moved to exert more control over its deliberations by announcing his intention to nominate two of his ardent political supporters to its board of directors: Stephen Moore, a conservative commentator who served as an economic adviser to the Trump campaign in 2016, and Herman Cain, a Republican businessman who ran for President, in 2012.

Ignoring widespread criticism that neither Moore nor Cain is remotely qualified to sit on the Fed’s board, Kudlow said on Sunday that Trump is standing behind both of them. “We have two open seats,” he told CNN. “The President has every right in the world to nominate people who share his economic philosophy.”

Business Insider: Trump’s pick of former pizza-chain CEO Herman Cain for the Federal Reserve already looks like it could crash and burn

It’s been less than a week since President Donald Trump announced the selection of Herman Cain, the former Godfather’s Pizza CEO and 2012 Republican presidential candidate, for the Federal Reserve Board. The outlook already doesn’t look good for the potential nomination.

Washington Post: Four Senate Republicans signal opposition to Trump’s plan to put Herman Cain on Federal Reserve Board, all but sinking nomination

A swift defection of at least four Senate Republicans has all but doomed Herman Cain’s chances of winning a seat on the Federal Reserve’s board of governors, a striking rebuke to President Trump in his drive to remake the powerful U.S. central bank.

The rapid rejection of Cain — a 2012 GOP presidential candidate — pauses Trump’s effort to remold the central bank into a more political body with outspoken individuals who share his views. It also reflects a growing unease among Senate Republicans with the way Trump has tried to bend the institution to his will in the past six months.

Trump has jawboned Fed officials and pushed them to slash interest rates and flood the economy with cheap money, even though during his presidential campaign he accused the central bank of creating a “big, fat, ugly bubble.”

So uncertainty in the US doesn’t help.

RNZ Robertson: NZ economy well placed to handle impact of global downturn

The IMF is predicting New Zealand’s growth rates will be well ahead of other OECD countries in the face of a delicate moment for the global economy, Finance Minister Grant Robertson says.

Two days ago the International Monetary Fund cut its forecast for world economic growth this year as the global economy slowed more than expected, raising risks of a sharp downturn.

The impact of trade tensions between the United States and China and issues in Europe, including Brexit and some poorer performing economies among EU member countries, were among key risks contributing to a “delicate moment” for the global economy, IMF chief economist Gita Gopinath said.

In its third downgrade since October, the IMF said the global economy will likely grow 3.3 percent this year, the slowest expansion since 2016. The forecast cut 0.2 percentage points from the IMF’s outlook in January.

The projected growth rate for next year was unchanged at 3.6 percent.

Mr Robertson, who is at IMF and World Bank meetings in Washington, told Morning Report the IMF was predicting New Zealand’s growth rates will be well ahead of other OECD countries.

However, with economies slowing down in other parts of the world, there would be an impact for New Zealand as a small trading nation. The economy remained strong with sound fundamentals, including relatively low debt, low unemployment, and surpluses in the 2018 Budget.

So while the New Zealand outlook is relatively good any slowdown elsewhere in the world, especially the US, Australia (which is looking shaky) and China, will have a negative impact here.

‘Surprise card’ (really?) could help sell CGT

An obvious possible aim with Michael Cullen’s Capital Gains Tax proposals, especially the very high tax rate, was that the Government could adopt a watered down version and sell that as a good thing – this is an old political trick, lead with something terrible and then claim that a half as terrible policy was somehow great.

There are hints that this is indeed a deliberate approach taken, with a more moderate CGT being quietly circulated.

Tom Pullar-Strecker (Stuff): Surprise card could help Labour sell a capital gains tax ‘light’

The Government has a trump card that could make a capital gains tax less unpopular and far harder for any future National government to reverse.

Tax Working Group chairman Sir Michael Cullen has proposed making a tax on capital gains “tax neutral” by handing back the $8.3 billion in revenue it is expected to generate over five years, mostly through income tax cuts and improved KiwiSaver incentives.

But a well-placed source believes the Government is likely to propose slashing the rate of a capital gains tax (CGT) and introducing significant exemptions to get the tax in place, while still offering all the major “carrots” and keeping the change tax-neutral.

That could be achieved simply by declaring that the CGT should be “tax neutral” over a longer period than five years, say 10 years.

A ‘well-placed source’ sounds suspiciously lie a leak strategy is being used.

The Government asked the Tax Working Group (TWG) to come up with tax packages that were tax neutral.

But Finance Minister Grant Robertson confirmed it was the working group that determined that should be over five years, with “no ministerial direction” on the timeframe.

Robertson would not rule out changing the time period, saying only that the Government was “carefully considering the report and all of its recommendations”.

The source suggested that if the Government did shift the goal posts set by the working group it could halve the maximum tax on capital gains from the currently proposed top income tax rate of 33 per cent, to 16 or 17 per cent.

It could also decide “not to touch KiwiSaver” by exempting KiwiSaver funds from paying tax on Australian and New Zealand shares, exclude more “lifestyle blocks” from a CGT, and introduce a threshold under which small business owners would not pay tax on their capital gains.

Together that would address the “four main concerns” with a CGT, including one “which is gaining traction” that it would be unfair to tax capital gains at 33 per cent while not adjusting them for inflation, the source said.

This makes it sound like Robertson may be the ‘well-placed source’. Which wouldn’t be surprising.

It also wouldn’t be surprising if Cullen and Robertson had either planned a strategy of proposing a heavy handed CGT and then switching to a CGT-lite from the start, or have sugested the lite version in response to the widespread negative reaction to the version proposed by the Tax Working Group.

Lengthening the period over which a CGT would be tax neutral could also make it less appealing for any future National government to quickly reverse the tax changes, since many of the benefits from the overall changes would then be more heavily “front loaded”, the source observed.

Chris Wales, a former leader of PwC’s global tax team who has advised prime ministers and finance ministers in several countries, including Britain’s Tony Blair, said the approach could be “wise, sensible and democratic”.

“At a simplistic level, people will, of course, be relieved that the potential breadth of a CGT has been reduced and that the rate is nowhere near the 33 per cent that the TWG has put forward,” Wales said, speaking from Kiev.

The Government could argue it had respected the outcome of the group’s deliberations but listened to the people as well, he said.

It sounds like ‘the people’ are being played here.

There’s not much of a surprise in that.