Where is fiscal policy going?

Last week's Half Year Economic and Fiscal Update, the HYEFU, got the usual coverage: the headline deficit, the debt profile, Treasury's latest economic outlook. All fine and well, and important issues in their own right, but equally as usual the coverage came and went with little or no mention of whether fiscal policy is boosting or braking the economy or by how much. 

That's pretty important in its own right too - people want to know whether a government is using fiscal policy to help in bad times, and especially through really rough times like the GFC, the Canterbury earthquakes and now Covid - but for some reason it never gets the air time it deserves. It's not helped by the jargon around measuring the stance of fiscal policy which only Treasury analysts and (cough) fiscal geeks could love.

So in my regular attempt to fill in the gap, here is the winner, by a wide margin, of the Most Important But Most Neglected Graph in a Treasury Publication award, from p8 of the HYEFU.

Stepping through this, the black line is the government's fiscal balance after you take out the effects of the state of the economy (that's the 'cyclically adjusted' reference) and after you take out things like interest payments which don't affect whether the government is boosting or braking economic activity (that's the 'primary' reference). What you're left with in principle is discretionary changes in fiscal policy settings.

Treasury says that "The continuation of supportive fiscal policy across the forecast period is shown by the large cyclically-adjusted primary balance deficit" (let's call it the CAPB). And that's true: anytime the government is adding to aggregate demand (with its expenditure) more than it is removing it (through taxes), it is being supportive. 

But there's more supportive and less supportive, and that's shown by the blue bars, which show the 'fiscal impulse', which is just the difference between one year's CAPB and the previous year's. As an example, in the year to June 2019, government policy was mildly a brake, to the tune of a CAPB surplus of 0.5% of GDP. In the 2020 June year, it had become a strong boost, with a CAPB deficit of 4.3% of GDP. That makes for a 4.8% of GDP 'fiscal impulse' turnaround from one year to the next. In the June 2021 year policy becomes more expansionary again (the CAPB deficit gets bigger / there's a positive fiscal impulse, same diff). All as it should have been through Covid, and many other governments did much the same (here's my comparison of our stance and Australia's).

Things are forecast to get trickier in the June 2022 year and beyond. Fiscal policy remains supportive throughout: there are ongoing CAPB deficits, but they get smaller as (for example) emergency Covid schemes are wound down. Fiscal policy is still expansionary, but progressively less so.. An analogy would be the Reserve Bank raising interest rates, but still leaving them at pretty low levels.

How quickly to cut back support, and by how much, is one tough policy call to make for government and its Treasury advisers. Here is what the fiscal policy outlook looked like in the past three Economic and Fiscal Updates.

It's shifted around quite a lot. Treasury says (p8 again) that "the fiscal impulse is lower in 2020/21, but less negative in 2021/22 and 2022/23. This is predominantly driven by some COVID-19-related expenditure previously expected in 2020/21 now taking place in later years across the forecast period". The latest profile also reflects, I'd guess, the Covid hit being not quite as bad as first feared, and the initial bounceback bigger and earlier than expected. 

Overall, the forecast fiscal stance looks pretty reasonable: there's still a hole in the economy where the international tourism and education sectors were, so ongoing fiscal support makes sense while that hole needs filling in, but winding it back also makes sense as the rest of the economy recovers. And if we're fully back to normal (2023 onwards?) you (a) don't want to risk being procyclical with needlessly supportive fiscal policy in good times and (b) it'll be time to start thinking more about debt sustainability.

The lag in planned expenditure that Treasury mentioned doesn't wholly surprise me. It's true that fiscal policy through Covid showed that it can be remarkably agile when it wants to be: apply for a wage subsidy on a Monday and have it in your bank account on a Tuesday was a remarkably fast policy decision and rollout. It gives the lie to older thinking that fiscal policy would always be too slow to matter, and the big countercyclical lever would have to be monetary policy (ignoring the fact that monetary policy itself has long and variable lags). All that said, I suspect that there was also a chunk of projects that proved to be shovel unready, as it were, and it's a further little glimpse of the planning, policy, and implementation sluggishness that's left us with our perpetual infrastructure deficit.

It can work after all

At our usual blistering pace - the Fair Trading Amendment Bill was introduced in Parliament 11 months ago, and is still with its Select Committee (Economic Development, Science and Innovation) - we are getting closer to prohibiting 'unconscionable conduct'. 

'Unconscionable'? It's not a term defined in the Bill, though the proposed new Section 8 of the Fair Trading Act lists a set of factors intended to help courts recognise it when they see it. And it's not a term you see much used in everyday speech, either. But if you substituted 'disgustingly ratbag', you'd be pretty much there. 

It seems a bit odd that our existing legislation has a hole in it this big, but never mind, we're filling it in. While you can always argue about potential over-reach or under-reach, and the similar issues that crop up with the design of any legislation, the general thrust of the Bill ought to be welcome to everyone: to consumers, obviously, to economists, who recognise that markets if they're going to weave their magic need to work without oppression or deceit, and of course to the vast majority of businesses who operate decently.

The trouble has been, though, that the Aussies, who legislated for this back in 2010, came a cropper when one of their regulators tried to ping what they saw as an obvious candidate: in the Kobelt case, the Aussie High Court disagreed. That case had been brought by ASIC, the Aussie financial regulator, but the ACCC, who you'd imagine would normally be running the bulk of these unconscionability cases, was seriously rattled by the ASIC case falling over. I listened to ACCC Commissioner Sarah Court talk with some degree of passion about it at the RBB Economics conference last year and again at this year's CLPINZ conference. 

You can see why the Aussies were beginning to wonder if they needed something other than full 'unconscionability' - maybe some kind of 'unfair' provision - to catch stuff that looked pretty bad but didn't quite reach the statutory unconscionability threshold. And we might have to confront the same issue, given that our proposed legislation looks a lot like theirs.

But fear not. The good news, just this week, is that that the ACCC has scored a thumping great unconscionability win, and it looks as if the law might bite after all. This time, it was about the gross mis-selling by Telstra of mobile phone contracts to certain indigenous customers. The ACCC's statement is here, and there's a good piece in the Australian Financial Review (if you've got a sub) here.

Interestingly, despite admission of liability, apologies, and extensive remediation on Telstra's part, the agreed penalty which will be put to the courts by  the ACCC and Telstra for approval is a stonking A$50 million, which (I learn from the AFR article) would be the second largest consumer law fine in Australia, second only to the A$125 million imposed on Volkswagen for the "dieselgate" faking of emission tests (Volkswagen is apparently appealing, after a judge had upped the initial proposed penalty from A$75 million).

Hopefully our unconscionability provision, when it finally emerges blinking in the sunlight, won't be called on often. But it's good to know that it can be made to sheet home to the worst of the rogues and the bullies. To be honest, if I was asked which would I rather see criminalised first, cartel behaviour or odious pressure selling, I'd have to sit down and have a good think, and the answer mightn't be cartels.

The Bank's other stuff

Yesterday's Monetary Policy Statement went entirely as expected - no change to the Official Cash Rate (still 0.25%), no change to the Large Scale Asset Purchasing Programme (still capped at $100 billion), and the introduction of the signalled Funding for Lending Programme, intended to provide a new source of cheap funding to lenders (three year funding at the OCR rate). 

If used fully, the new FLP would amount to $28 billion. In Australia, the equivalent Term Funding Facility, which has been going since April, has a capacity of some A$200 billion, or about NZ$212 billion. Divide by 7 as a rough pro rata rule of thumb and the Aussie TFF would be a NZ$30 billion or so programme here, so the good news is that we've introduced a similar-sized stimulus.

There is a line of thinking that providing extra funding for lending might be the proverbial 'pushing on a string' if, in still unsettled Covid conditions, borrowers aren't much minded to take on more debt or banks aren't much minded to take on more risk, and it's true that (as of early November) the Aussie one has seen only A$83 billion taken up, or some 40% of the total available. But as the RBNZ said in the Statement, the actual take-up may not matter so much if the new FLP gets the cost of borrowing down, or as the Bank put it (p21)

The key success metric of the FLP will be whether it results in declines in funding costs, and encourages recent declines in these costs to be passed through to lower household and business borrowing costs. We could see a scenario where FLP funds are only drawn down in small amounts, but its availability encourages a broad decline in interest rates. We would consider this scenario successful, even though actual use of the FLP would seem minimal.

There's always interesting stuff in the body of the Statement and this time round I was especially interested in what the RBNZ had found as it went around the business traps, and in its comments on house prices.

"Many businesses", the Statement said (p18), "expressed concern about finding required staff. Some firms noted that re-deploying staff from one industry to another can be difficult, particularly for skilled jobs. Many firms rely on hiring skilled workers from abroad, which they have been unable to do because of the border closure". 

Granted, the large numbers at risk of losing their jobs in the most affected sectors - the Statement reckoned that pre-Covid international tourism and education made up 6% of GDP - won't always be a good fit for the vacancies available elsewhere, and labour market policy is always going to struggle to assist the transition. "Active" labour market policies (like these successful ones) try to ease the process, but you do wonder whether we've got enough of them. And the reported dependence on overseas skills again makes you wonder how well our labour market is working to match up the demand for skills with the supply of them.

House prices have grabbed everyone's attention, not least because the latest resurgence wasn't supposed to happen in a world where (supposedly) shell-shocked households were hunkering down, not trading up the house. It got a fair bit of attention at the media conference at the Bank after the Statement (tune in around the 29:25 mark, and stay with the rest of the video). But the Bank was quite right to say that it's not its ever-lower interest rates that are the big moving part in the house price increases. As it - completely correctly - said in the Statement (p28):

High house prices in New Zealand largely reflect structural and regulatory issues in New Zealand’s housing market. In particular, land use restrictions, such as urban planning rules, limit the land available for housing and how intensively it can be used. These land use restrictions impede the ability of the market to increase the supply of houses when demand for houses increases. As a result, house prices tend to increase more than otherwise in response to higher housing demand. Other supply-side issues include infrastructure  planning, the building consent process, and the cost of building.

You can berate the Bank all you like, and launch market studies into the building materials trade till you're blue in the face. They're all in the twopenny halfpenny place. Nothing's going to happen to high house prices until the supply side of the market starts to work a lot, lot better.

More market studies

We've got more market studies lining up: as Labour announced during the election campaign there will be two new ones, into supermarkets and building materials. 

No dramas there, but there are two aspects I'd like to pick up on.

One is that the Commerce Act says that either the Commerce Commission (s50) or the Minister for Commerce (s51), now Dr David Clark, can initiate a market study if either "considers it to be in the public interest to do so". "In the public interest" isn't defined, but the FAQ that went out with the announcement included this:

A study is considered to be in the public interest if it promotes the purpose of the Commerce Act – to promote competition in markets for the long-term benefit of consumers within New Zealand, and the following criteria may be relevant:

• There are existing indications of competition problems in the market (such as high prices or low levels of innovation).
• The market is of strategic importance to the New Zealand economy or consumers.
•  It is likely there will be viable solutions to any issues that are found.
•  A formal Commerce Commission study would add value above work that could be done by other government agencies.

That's not a bad checklist. I wouldn't have run with the "strategic" point myself but the others look good. It mightn't be a bad idea to lock the criteria in, in some codified form.

The timing of the announcement though was not ideal. Last December, when I said "I'd heard rumours" about the next market studies, it was pretty much an open secret around the competition policy traps that supermarkets and building materials were next cabs off the rank. Either of them could have been got underway then, once the Commission's resources had been freed up after the petrol market study was finished, rather than nine months later in the middle of an election campaign. 

I don't mind candidates for office telling us what they plan to do: heaven knows, we've seen enough in New Zealand of politicians springing things on us. But we are in the early stages of bedding in our new regime and it would be better if the initiation of market studies were kept away from electioneering. We don't need the risk that business, and perhaps wider public, support for our shiny new market studies gets chipped away if the process appears politicised. 

Theirs and ours

Yesterday the Aussies had their latest Budget: I won't recap all the details as they're easily available all over the place, and if you want some expert economic commentary you could try National Australia Bank's or Westpac's, and you can also go to the horse's mouth and read the Aussies' Budget Strategy and Outlook Budget Paper No. 1 2020-21. I'll just note that I particularly liked the big boost to investment by way of instant expensing of capital spending, available to every firm except the very. very biggest ones; the job subsidies for businesses who hire currently unemployed younger people; the targeting of tax reliefs to the lower end of the income scale; and the focus on increased infrastructure spending.

As regular readers know, the thing I like to look at, but which usually gets under-reported or not reported at all, is whether fiscal policy is boosting or braking the economy. It can be self-evident: when you spend up on the scale of anti-covid stimulus that both our Grant Robertson and their Josh Freydenberg have, it's pretty obviously a boost. But not always: the headline fiscal numbers can be misleading, and in any event it's also useful to know the extent of the stimulus and not just the direction.

So here are the numbers for the 'fiscal impulse': it's an approximation based on in-the-background calculations of variable debatability, but for all that it's still the best measure we've got. I've shown Australia's (from last night's Budget) and New Zealand's (from September's Pre-Election Economic and Fiscal Update or HYEFU). For fiscal policy tragics, I've calculated Australia's as the year on year change in the underlying cash balance as a percentage of GDP, and for New Zealand I've used Treasury's numbers.

What's interesting is that both governments have reacted very similarly indeed. The Aussie stimulus giveth a bit more in the current 2020-21 year, and taketh away a bit more in the subsequent 2021-22 year, but there's not much other difference in the overall pattern since covid hit (pre-covid, the Aussies were playing a bit more of a macho 'I can get back to fiscal surplus faster than you can' political game than we were). Personally I take a bit of policy comfort from the similarity: if they were very different, you'd be inclined to think one (or both) may have lost the plot.

It's also got me thinking a bit more about that fiscal tightening you can see planned for 2021-22 in both countries. Normally a fiscal tightening of 5.4% of GDP (Australia) or 3.7% of GDP (us) would be a massive brake on an economy, and when I wrote up the HYEFU I doubted if the New Zealand economy in 2021-22 would be in anywhere strong enough shape to cope with it. You could say the same about Australia's even larger brake: on their Treasury's forecasts, unemployment will still be 6.5% in June 2022.

But I'm beginning to appreciate that the fiscal tightening might be a bit more apparent than real. Suppose a big slab of 2020-21 fiscal support consisted of temporary wage subsidies, entirely appropriate while companies were facing weak demand. Covid disperses, demand picks up, the subsidies are yanked (and turn up as part of that fiscal 'tightening in 2021-22), but businesses don't really mind. The temporary government cash has been replaced by ongoing customer cash, all good. It's not experienced as much of a 'tightening' at all.

Fair enough, but another way of putting it is that the current forecasts of a reasonably quick withdrawal of fiscal support depend on that recovery in the non-government economy. I'm inclined at the moment to stay on the cautious side. It would be great if both economies bounced back big and quick - the proverbial V-shaped recovery - but I wouldn't be surprised if we ended up with a W or other variant. I suspect both countries' fiscal policies will have to be a bit more supportive, for longer, than their Treasurers currently expect.

Keep up the stimulus

Last week I was making the point that one of the key things to look for in the Pre-Election Economic and Fiscal Update or PREFU was whether fiscal policy was going to be supportive or contractionary over the next wee while, and to what extent, and whether the proposed fiscal stance matched up with the likely state of the economy. 

You might have thought that Ministers of Finance need no special advice on aligning fiscal policy with the cyclical needs of the economy. Surely (you might have thought) they let it rip when times are bad, and wind it back when times are good: obvs, to use the technical macroeconomic term.

And if so you'd be in for an unpleasant surprise, at least if you were a citizen of the US or the EU. Overnight we had this presentation from the OECD on their latest economic outlook. It included this graph, where the blue bars are the same measure of the stance of fiscal policy I used in looking at least week's PREFU, except that the OECD shows bars above the line as fiscal tightening and bars below as loosening (our Treasury does the opposite, it's arbitrary, either works). The yellow triangles are a measure of how poorly each regional economy is faring. The grey shaded area is the GFC.

In both the US and the EU you'll see the local fiscal response was bang on: decent sized fiscal stimulus. And in both regions you'll see that it was taken away much too soon. There are all sorts of reasons why the GFC was a doozy, but premature fiscal braking was one of the larger moving parts. Inevitably politics played a large part, including a Republican Congress wanting to unwind anything President Obama initiated.

The OECD says, rightly, that eventually everybody's fiscal house will have to be put back in order, and done the right way, but as of today "Undertaking fiscal consolidation measures now would be premature". I suspect in our case the eventual retrenchment won't be able to get started  before 2023.

The other big messages are that the world economic outlook, on the OECD's latest base scenario, is a bit better than it was when the OECD took its last stab at a guess back in June ...

... but before rushing out into the street to celebrate, bear in  mind that the range of uncertainty around the base scenario is still very wide, as it is here at home.

Finally, the OECD points out (on p10 of the Outlook) that

With long-term interest rates close to zero in many advanced economies, the social rate of return on public investment is likely to exceed the financing costs for many projects. Investment is particularly needed in areas that have large positive externalities for the rest of the economy and where under-investment might otherwise occur due to market failures, including in health care, education, and digital and environmental infrastructure.

Here in Auckland the Bridge has been out, aggravating the already inadequate transport infrastructure, the water supply is iffy, and housing land remains stratospherically expensive: I passed a sub-division the other day, admittedly with largish sections in a nice rural area, where section prices are "from $985,000". When are we going to start fixing it, if not now?

The most important bit

Every year we get Treasury's economic and fiscal updates - the latest, the Pre-Election Economic and Fiscal Update or PREFU on Wednesday - and every year the analysts and the pundits get stuck into the size and pattern of government spending and taxation, the size and trend of the fiscal surplus or deficit, and the size and trend of government debt. All worthy topics, to be sure. 

Yet every year one of the most important aspects of the update struggles to get a proper look in. It should be right up there with the politicised argy-bargy over whose plan for debt is better than whose. This year it's arguably the single most important aspect of the update.

It's whether fiscal policy is boosting or braking the economy. That's important anytime, but doubly important now: once because of fighting the impact of covid, obvs, but also because the other big policy tool for managing the economic cycle, monetary policy, has mostly shot its bolt, so perforce most of the the heavy stabilisation lifting from here will need to be done by Grant Robertson rather than by Adrian Orr.

Here's what the expected impact of fiscal policy is looking like. All these kinds of fiscal impact calculations are by guess and by God, but they're all we have and despite their inherent measurement challenges they're probably in the right general area. I've included the likely impact as shown in the PREFU and the shape that had been expected back in the May Budget.

First of all fiscal policy is strongly expansionary over the next two years, as it should be. And the shape is looking more realistic and more appropriate in the PREFU than it looked back in May at Budget time. I wasn't sure that the government machine was capable of delivering that big a boost in 2019-20 in that short a time (unless it was very heavily weighted to get-it-into-people's-bank-accounts-quickly initiatives like wage subsidies). And it's become apparent that fiscal support will need to be kept going for longer than previously thought, so healthy fiscal stimulus in both 2019-20 and 2020-21 rather than one big hit in 2019-20 is looking a better plan.

The odd thing, though, is the planned and quite large (3.7% of GDP) contractionary impact from fiscal policy in 2021-22. Sure, at some point a Minister of Finance has to tack back on the other course, either (in the short term) because the economy is now strong enough not to need further fiscal stimulus or (in the longer term) because deficits and debt will need some repair work. But 2021-22 is not that point. On Treasury's forecasts the unemployment rate will still be 7.6% in June 2022, still unacceptably high and in no way the appropriate time to slam on the fiscal brakes. 

Another way of getting to the same point is to look at the 'output gap', which is how far the economy is below full employment of its resources. Here's the PREFU estimate (which I backed out of the data supporting Figure 1.6 in the PREFU). An economy still substantially (4.0%) below full potential in mid June 2022 is an economy that is not ready for fiscal retrenchment.

What I drew from the PREFU is that fiscal policy is at the moment appropriately supportive, but also that - barring a miraculously early development and deployment of a covid vaccine - there is a degree of unreality about how quickly the current levels of stimulus can safely be withdrawn.

An excellent resource

Interested in staying up with Australia's criminalisation of cartels, and New Zealand's impending move to do the same? Then head over to the MLex site and download your free copy of  'Collusion Damage: Australia’s struggle to secure its first criminal cartel convictions — and make jail time a deterrent at last '.

It's an excellent resource. As the report says, "Since the first individual criminal cartel charges were laid early in 2018, MLex has been present at every material court hearing in Canberra, Melbourne and Sydney", and the expertise shows. The report is on top of all the cases currently live. My take, not theirs, but after reading this report, and also going by the coverage of the case in the Australian Financial Review, I do wonder from a variety of perspectives if the ACCC is going to succeed with its alleged cartel case against the underwriter banks left with unsold ANZ Bank shares. 

There's a chapter in the report about New Zealand's impending regime, where I agree with MLex that "It’s true that the Commerce Commission will still have the full suite of civil offenses at its disposal and will be under no obligation to unleash a criminal prosecution for trivial matters. Yet ensuring that well-meaning, small businesses -  those that aren’t large enough to have in-house counsel or even to employ a law firm to review their decisions - don’t get caught up with criminal offenses designed to ensnare larger, possibly global players, will remain a challenge for the agency".

In writing up the CLPINZ session on cartel criminalisation I'd also wondered about potential overkill, and had assumed we in New Zealand would end up with some arrangement similar to that between the ACCC and the Commonwealth Director of Public Prosecutions, which hopefully would set some seriousness threshold before unleashing the criminal process. But I learn from the MLex report that "Unlike the ACCC, the Commerce Commission will be able to take its investigations to court directly, without handing the file over to public prosecutors; however, it will be required to ascertain how its planned prosecution measures up with the Solicitor General’s Prosecution Guidelines, which demand “evidential sufficiency” and proof that the prosecution is in the public interest". As the Guidelines say, "The predominant consideration is the seriousness of the offence", and hopefully a conservative approach will be the way to go, rather than feeling the collar of commercial naïfs.

Speaking of resources, I came across the MLex report on its useful Twitter feed. If you're interested in competition tweets, head over to my own Twitter posts and help yourself to my Twitter 'Competition' list (currently 73 members). And if New Zealand economics is your thing, then the 'NZ economics' list (52 members) should be of interest. If there are local competition or economics folks I've missed, let me know and I'll add them.

It's not every day ...

 ... you get to listen to a Nobel prize winning economist, so big shout out to the University of Auckland for its Dean's Distinguished Virtual Public Lecture last night by Nobel Laureate Jean Tirole, Professor at the Toulouse School of Economics, and further hat tip to the university's extending the availability of the lecture to the Law and Economics Association of New Zealand (LEANZ, you are a member, aren't you?).

Tirole was talking about "Digital Dystopia", or as the invite put it, "How transparent should our life be to others? Modern societies are struggling with this issue as connected objects, social networks, ratings, artificial intelligence, facial recognition, cheap computer power and various other innovations make it increasingly easy to collect, store and analyse personal data. While this holds the promise of a more civilised society ... citizens and human rights activists fret over the prospect of mass surveillance by powerful players engaging in the collection of bulk data in shrouded secrecy. A dystopian scenario will be used to emphasise the excesses that may result from an unfettered usage of data integration in a digital era".

Truth be told, it wasn't the easiest presentation to follow: not because of Tirole, whose style is affable and conversational, but more because Zoom webinars are not the best medium for presenting equation-rich material, or at least not for those of us below Tirolean levels of mathematical deftness. Most of the invited panel of commentators appeared to have read it beforehand, and that was the sensible thing to do - here's a link.

Even if the details of the maths beat me, I got the message, and it's plausible. Tirole said that, at first, people had assumed that the likes of the internet and other modern social tech would be a good thing - empowering the previously voiceless and all that - and momentarily reminding me of the optimism around the Summer of Love before it petered out into drug overdoses in squalid squats. But he reckons that this upbeat assumption, like the flower children's, is worth revisiting, and that there are real risks of technologies like facial recognition becoming oppressive - and effective - methods of totalitarian control. The poster child in his presentation was China's proposed 'social credit' rating system, which looks to bundle all of a person's activity into a composite measure of whether they are a good citizen in their everyday life and whether they are going with the Communist Party flow, with potentially unpleasant personal consequences if they aren't (for example though restrictions on their access to credit, employment, education or travel).

In the discussion afterwards, there were quite a few questions (including mine) about whether the social credit rating would be as effective as feared. My thinking had been that people would see through the government's rating as a political device - I was reminded of the crack in the Soviet Union that "we pretend to work and they pretend to pay us" - and would actually judge you by (for example) your buyer or seller scores on whatever is the Chinese equivalent of eBay. 

Tirole, as we should have expected, had thought of that, and his answer was that an authority minded to go down the social credit rating route would deal to the private scoring systems to stop them being used in exactly that way. On p4 of the paper he says, "The state must eliminate competition from independent, privately-provided social ratings. Because economic agents are interested in the social reliability of their partners, but not in whether these partners’ tastes fit with the government’s views, private platforms would expunge any information about political views from their ratings. This competition would lead to de facto unbundling, with no-one paying attention to the government’s social score". 

He also said that people couldn't just ignore the ratings when they carried real penalties, and he pointed to an insidious feature of the rating system, 'guilt by association'. You might well want to allow the poorly rated dissident to buy a business class air ticket, but your own rating will suffer if you do. It reminded me that we've been here before: how many people kept buying from Jewish shops in 1934, when the SS were taking notes? Tirole also raised some interesting historical parallels, quoting Aldous Huxley's letter to George Orwell in 1949, where Huxley felt that oppressive governments would find it easier to go for lower cost routes than running gulags. Orwell was right in the shorter-term, but Huxley might be closer today: "the recent developments fit well with his overall vision" (p6).

What should be done? "A key challenge for our digital society will be to come up with principle-based policy frameworks that discipline governments and private platforms in their integration and disclosure of data about individuals" (pp35-6). But as he also says with very considerable understatement, "The exact contours of such disciplined principles are still to be identified", particularly (I'd add) because we also want to keep sight of the very large benefits the new platforms have brought.  Tirole argued for the desirability of keeping divisive issues out of the databases and aiming to "monitor platforms' foray into political coverage unless platform regulation is performed by one or several entirely independent agencies".

Three management questions

Look, I'm an economist, and management thinking isn't normally my thing, and what do I know anyway, but from assorted encounters over the last wee while I've got three questions.

1 Are people kidding themselves about post-Covid working conditions?

There's a lot of optimism about remote working increasingly coming to replace the traditional battery hen office and its zero-privacy rent-minimising collaborative open spaces. I'm reasonably optimistic myself, as I wrote in 'Why the status quo is in for a hard time after COVID-19', where inter alia I said that "My guess is that we’ll look back at pre-COVID management practices like we look back at photos of 1950s typing pools". It'll be useful, too, if the evidence confirms that there is indeed a free lunch here - happier, more empowered employees and higher productivity. But I'm also wondering: in the businesses where the core problem is a command-and-control, hierarchical management mindset, how much will really change? Will us optimists be blindsided by the rise of things like intrusive computer monitoring software and locked-down-tight collaborative 'tools'? 

2 And while we're talking computer systems ...

Why is it that virtually every corporate in the western world provides its employees with gear that's more limited than what they could buy themselves, for less, at the nearest Noel Leeming or Harvey Norman?

3 'Stars'

There's been any amount of angst about the widening gap between the pay of the CEO and the pay of the average Jack or Jill. And then I read the other day about yet another company that's just recruited its new CEO from the marketplace for top executives. Fine: good luck to them. Probably a great pick who'll do them well. But I've got two observations. If every big company starts fishing in that pool - or to fake an economics veneer to it, the demand curve shifts out to the right - should anyone be surprised if CEO salaries blow out? And whatever happened to what I always thought was one of the main responsibilities of a board, which was to make sure that the current CEO was developing enough internal bench strength?

CLPINZ 2020 goes online

Last week's Competition Law and Policy Institute (CLPINZ) workshop was - perforce - the first time CLPINZ has run the annual event online, and the good news is that the technology worked just fine (ably organised by Conference Innovators, special hat-tip Olivia Lynch). Covid is reshaping a lot of things (as I wrote in Acuity, the accountants' magazine) and sometimes for the better. Online workshops may not provide the same personal contacts and networking but they can deliver a lot of bang per buck once travel costs don't come into the equation for speakers or attendees.

Can't cover everything but here are some of my highlights.

The keynote was the topical 'Antitrust in times of crisis and emerging from the crisis', by Maureen K. Ohlhausen from Baker Botts in Washington DC, with commentary by Ayman Guirguis from K&L Gates in Sydney and session chair Anna Ryan of Lane Neave in Christchurch. One theme was the need for competition authorities everywhere to scramble hard to authorise (or at a minimum stand aside from preventing) collaborative activities between firms who would normally be competitors, when they are responding to covid logistical challenges (eg coordination of grocery deliveries, or availability of medical resources). The ACCC in particular has in my view been commendably quick to get provisional authorisations out the door. 

Another was how to treat 'failing firms': there are a lot of cases where firms are in trouble (or heading for foreseeable trouble) and while they can't qualify for the usually strict merger conditions around a 'failing firm', a properly forward-looking analysis of the competitive outlook might well lead you to allow a merger. 

A third theme was the renewed focus on market power in the tech space now that we're all even more dependent on the big tech names for our remote working and our online shopping. The conclusion as I saw it was that there is still no clear verdict on whether these markets are naturally tippy towards one predominant incumbent, or whether there are issues of market power that need to be corrected.

Consumer law isn't usually top of my interests, but I was very much taken with the session on 'Unconscionability and unfair contract terms', where the speaker was Sarah Court, Commissioner, ACCC, the commentator Anna Rawlings, Chair of the NZ Commerce Commission, and session chair James Craig of Simpson Grierson. As background, Australia's got unconscionability on the statute books, and we're minded to go the same way. I'd heard Sarah Court on this topic before (see here) and while the Kobelt case she cites as showing the Aussie law isn't working might be one of those odd cases that might not influence anything over the longer haul, there's a real chance that our courts might also struggle to nail genuinely ratbag behaviour. Why not read Kobelt and see what your call would have been? And if you think Kobelt got the wrong end of the stick, what would you suggest to fix it?

Another area where we look to be heading to align our legislation with the Aussies is changing our current s36 of the Commerce Act, the bit that deals with abuse of market power. The plan is we will move away from our current legal test (which focuses on the 'counterfactual test' of what would a firm without market power have done) to an 'effects test' which, as it says on the tin, tries to take an objective view of whether the conduct actually works anti-competitively (both jurisdictions would also retain anticompetitive purpose, which would catch those incriminating internal e-mails). 

I went into this session - 'Misuse of market power – what an 'effects test' would mean for New Zealand', speaker Dr Katharine Kemp from the University of New South Wales, commentator Brent Fisse of Brent Fisse Lawyers, session chair John Land from Bankside Chambers - with what I regret to reveal was a largely closed mind: I'm pro-change. But I came out with the odd niggle of doubt about potential over-reach. Faced with the choice of the status quo or the change, I'd still change, as the counterfactual test asks the wrong question plus we get the benefit of trans-Tasman alignment, but I suspect policy analysts on both sides of the Tasman will be watching the first few 'effects' cases very closely indeed.

And yet another area where we are harmonising with the Aussies (and with global practice generally) is criminalisation of cartels, where on the topic of  'Cartels – criminalisation – lessons from the Australian experience' we heard from Marcus Bezzi, Executive General Manager at the  ACCC, commentary from Marc Corlett QC from Britomart Chambers, chairing by Glenn Shewan from Bell Gully. I'm generally not in favour of yet more criminal offences when we already have far too many people in jail (by developed economy standards), but I'm prepared to make an exception for 'hard core' cartels which I see from a moral perspective as akin to fraud (quite apart from the often sizeable economic detriments).

One thing that's worried me, though, is that every 'ordinary' New Zealand cartel, if I can call it that, would attract criminal charges, which I would regard as overkill. I was partly relieved to hear Marcus talk about a memorandum of understanding between the ACCC and the Aussie Commonwealth Director of Public Prosecutions which aims to keep the criminal route for the worse cases, which is surely right. I presume something similar will go into place here at home before we go live in April next year. Marc Corlett's remarks said (to me at least) that individuals caught in the grinder between the criminal prosecutor and a perhaps not always supportive employer are going to be in a tough place: another reason in my view to make sure that we concentrate on the hard core conduct and the big fish.

The session on 'Acquisitions of nascent competitors', speaker Renata B. Hesse from Sullivan & Cromwell in Washington DC (who if I heard it right may indeed have coined the phrase 'killer acquisition'), commentator Iain Thain from DLA Piper in Auckland, session chair Will Taylor from NERA Economic Consulting in Auckland, got me thinking. This is a really tough area. It's important to stop killer acquisitions: as Iain emphasised, it's the competitive struggle that unearths all sorts of lucky discoveries (sometimes unexpected ones) even if in the end the market tips to one big winner. But it is very hard for competition authorities to deal with, when even those most up with the game in any given sector can't be sure what might have developed into a credible challenger to an incumbent, but for its pre-emptive acquisition. As Renata said, you're often trying to do an objective analysis of something that is inherently subjective. 

Some days I favour channelling my inner Schumpeter, not worrying too much about temporary tech monopolies and letting it all play out in the creative destruction gale. Sometimes there must be good outcomes when an incumbent offers a genuinely better product, once it has bolted on the smaller-firm functionality it's just bought, whereas you might be waiting years for the small firm to develop a full-feature offering. But then will incumbents' internal R&D slack off if they can rely on buying the next bright idea? And what if ... you get the drift. This is hard.

Life's too short to summarise everything but for the record we also had an economists' panel - 'Hipster economists? Values, welfare and evidence', and a corporate counsel oriented panel - 'Handy hints for practice – Joint ventures and commercial agreements', and if they ring your bell you can get in touch with the panellists (here's the full workshop programme with the details).

It helps, but we'll need more than this

No surprises in today's Monetary Policy Statement from the Reserve Bank. The official cash rate (OCR) was kept at 0.25% - as every one of us surveyed in the Finder forecaster survey had expected - and the size of the Bank's Large Scale Asset Purchase (LSAP) programme was increased to $100 billion. The point of the LSAP is to keep longer-term interest rates down by buying bonds: me, I'd be tempted to go the Aussie route where they've explicitly said what rate they're aiming for (0.25% for the Aussie three-year government bond). The RBNZ governor got asked at the press conference if the RBNZ was minded to some explicit bond yield targeting: it isn't ruled out, but it's not being ruled in, either. Can't see it hurting, as it would add to the information available on where the RBNZ is headed over time, its 'forward guidance' in the jargon.

Speaking of which, I'm not really sure anymore why the RB is keeping the OCR at 0.25%. Yes, it seems to want to have its forward guidance seen as rock solid, and it had said back in March that the OCR would be on hold "for at least the next 12 months". There may also have been some element of giving the banks a heads up about a timetable for getting their systems in order to handle a negative OCR. But in the wider scheme of things I'm inclined to think the extra support from a 0.25% cut now, especially if it helped weaken the NZ$, trumps the forward guidance credibility. And there is  not a lot of credibility downside risk anyway, given the recent turn of events and a new community outbreak. When the facts change, etc.

It's also worth pointing out that some of the Bank's other policy options would also get more bang per buck if the OCR were lower. As the Statement said, "Because the NZGB [New Zealand Government Bond] curve is already relatively flat around the current level of the OCR, a lower OCR would likely increase the effectiveness of LSAPs by lowering short-term interest rates and allowing LSAPs to flatten the yield curve at a lower level" (p19) and "A term lending programme may be increasingly useful for supporting the pass-through of monetary stimulus if the OCR were reduced" (p20).

But in any event further policy support, if only by way of a bigger LSAP at this stage, is absolutely the right thing to do, and would have been even without the latest Covid outbreak. And it's helpful that its previous easing is also quietly bearing fruit: as the Statement pointed out, "At least 50 percent of mortgages are due to be re-priced in the next 12 months" (p18), which will make quite a difference to a lot of households. 

At the same time you can't help feeling that monetary policy is well into diminishing returns territory. As cropped up in the press conference, marginal changes to interest rates aren't going to make much difference if, in deeply uncertain times, borrowers won't borrow and lenders won't lend. So the heavy lifting from here is going to have to be done by fiscal policy, and earlier plans to put the revolver back in the holster now look behind the curve.

Fiscal policy has been hugely important up to now: the Statement rightly pointed out that "The Wage Subsidy has temporarily supported more than 71 percent of New Zealand businesses and 1.7 million workers, helping employers to retain staff. As a result, the [Covid] impacts on employment to date have been small despite the unprecedented reduction in economic activity" (p25). The reality is that it's going to have to do a lot more again: "Fiscal stimulus is likely to be more significant and more front-loaded than we assumed in the May Statement" (p18). 

At this point, though, we don't have a great feel for what's likely to happen on the fiscal front, or as the Statement phrased it, "The exact timing, composition, and magnitude of government spending remains uncertain" (p10). August 20's Pre-Election Economic and Fiscal Update is going to be one of the most important policy statements of recent times. And I very much hope it doesn't fall into the election campaign's depressing "I can out-austere you" heffalump trap.

Finally a wonkish point that only an economist will warm to, but it's important all the same. One of the things you need to know when you're trying to figure out how monetary policy is working is what interest rates people actually pay or receive (duh, but bear with me). The Statement noted, however, that "Detailed data on business lending rates is limited. The Reserve Bank has begun collecting information on actual new lending rates faced by firms, which will enable better monitoring of monetary policy transmission to businesses in the future" (p18)

Better late than never, and well done the Bank for getting on with it, but it's yet another Covid-revealed instance of our statistical infrastructure letting us down. On the other side of the election, the next Prime Minister could usefully appoint herself Minister for Statistics, and find out why have we been so bad over long periods of time at collecting the fuller set of data that policymakers - and the rest of us - need. It's a gap that's all the more bizarre when the world is awash in data that can be turned into useful official info, as Stats, the RB and Treasury recently showed when they came up with the New Zealand Activity Indicator. 

In campaign season, the pols are prepared to make all sorts of commitments: how about committing to a fully First World set of statistics?

The OECD's take

Yesterday I had a go at estimating what the drop in New Zealand GDP had been during the June quarter, when the lockdowns were in place. Meanwhile, in Paris, the OECD was just putting to bed its Employment Outlook 2020 (best link here, others got on my wick with overenthusiastic use of dynamic charts and highlighted text), and they helpfully included this chart of what they think happened in June across the OECD. 

They have the New Zealand June decline at -15%: yet another sign that our June quarter wasn't quite as bad as it originally shaped up to be. It's also, despite the relative stringency of our lockdown, not too bad an outcome by OECD standards: the median decline across the OECD was -12.9%. If you'd like the raw data to play with they're here.

The OECD report also had this interesting chart on use of wage subsidy (and similar) schemes. We're right over there on the left hand side as a big user.

That's fine by me - it was IMHO a completely appropriate and even necessary fiscal response, and especially by New Zealand's chronic micromanagement standards a remarkably quick, simple and effective one. And it's interesting to see that nearly all of the other countries (ex France and Germany) went the same hassle-free 'ask no questions' route and approved virtually every application that came in.

As things stand, the wage subsidy scheme won't be available for much longer (last applications close on September 1): at the moment I can't see how it can sensibly be wound up without some replacement made available for the worst of the tourism, hospitality and accommodation sectors.

Another improvement

Covid exposed, not for the first time, how New Zealand is short on timely official measures of the economic cycle. 

While that's true, let's acknowledge some qualifications. For one thing, it's not just us: many countries have struggled to figure out anything close to a real-time view of the state of the economy. And for another, we've had some progress in filling in the gaps, notably Stats' publication of monthly electronic transactions and monthly filled jobs. And where the official statistics haven't fronted up, there's a wide variety of timely private sector information, notably the ANZ's various monthly surveys and the BNZ/BusinessNZ ones.

But the general proposition stands: we haven't had a good enough range of near-real-time official data to give policymakers at the Reserve Bank, Treasury, or elsewhere a good enough feel for where we are and, from that, what needs to be done about it.

So let's put our hands together and applaud Stats, the Treasury and the Reserve Bank for cooperating to design the New Zealand Activity indicator (announcement, first results, technical note, Q&A). It's bound to become one of the go-to statistics for reading the shape of the business cycle. And another round of applause, please, for the decision to keep the thing going beyond the covid-inspired need. One of the things that's bothering me is that while people in various organisations have scrambled hard in difficult circumstances to provide quicker information on the economy, it's by no means certain that the new, useful data that Stats and others have been providing will be maintained post-covid. Daft, of course, that anyone would think of going back to where we were, but there you have it.

I really like this new Activity indicator, or NZAC as I suppose we'll have to get used to calling it. I'm a great fan of the statistical method used to put it together (principal components): it basically tries to identify what common factor is driving the variability across a whole range of different measure such as traffic count and electricity generation. The answer of course, is the overall level of economic activity, and with principal components analysis you can get a good handle on the behaviour of that underlying driver.

How good? Startlingly good, as it happens, as this graph shows (from p5 of the technical note) .

Let's face it. NZAC, and GDP, when shown a year on year percentage changes, are essentially the same thing. And no, I don't want any lectures from the people who put NZAC together, that NZAC and GDP aren't the same thing. I know that. You know that. And strictly speaking I suppose that Stats / the RB / Treasury are right when they say (p4 of the technical note) that "NZAC should not be interpreted as a 'flash estimate' or high-frequency measure of GDP" (though many angels could dance on what exactly 'estimate' means, and why something that gets remarkably close to the eventual outcome isn't for some reason an 'estimate'). So while the purists behind NZAC are technically right, and even as you read this there's probably some analyst at Stats going "See, I told you so! They're going to make a balls-up of it", I'm going to go ahead and say that NZAC is a pretty good advance estimate of GDP.

Which, by the way, you can figure out from the technical note itself. On p4 it says that the NZAC registered year on year changes of 1.5% (January), 1.8% (February), and -4.3% (March). Average those out and you get an average NZAC decline for the quarter of -0.3%. That compares with the official GDP figure of -0.2%. Pretty good, eh? The Q&A document (p3) shows that the NZAC in late 2019 registered 1.3% (October), 1.8% (November), and 1.7% (December), which averages 1.6%, again pretty close to the official 1.8% outcome. There are commercial forecasters who'd dine out on that level of accuracy.

Parking all that, let's use the NZAC to try and figure out what actually happened to GDP in the June quarter. It's a critical thing to know: it's not the only cost of covid, but it was a big one, and it informs how hard fiscal (and monetary) policy needed to push back. 

Here's the calculation. At the moment we've only got the April and May NZACs, so I'm going to make three guesses at June - continued improvement (a reading of -3), a stronger recovery taking us back to last year's activity level (a reading of 0), and a pent-up demand rebound that actually takes up well up last year's level (+5). That'll give three averages for the June quarter NZAC, which I'll then take to be the percentage change in GDP from Q2 2019, giving us Q2 2020 GDP. We already know Q1 2020, so we can then see the change from Q1 2020 to Q2 2020.

One wrinkle. The NZAC Q&A documents says (in Question 14) there's a good chance that the April NZAC may not have captured the full fall in economic activity in the month: "Many areas of activity that were severely hit under level 4 – such as tourism, hospitality, education, and construction (to name just a few) – are not necessarily well captured in NZAC ... We consider it likely that if indicators of such activity could be obtained, the magnitude of the drop in April shown by NZAC would be magnified. In fact, we fully expect the size of this drop to be revised as the index is refined". So as well as three possibilities for the June NZAC, I've run with three possibilities for the April NZAC: as reported (-19), a bit worse (-25) and a lot worse (-40).

And here's what comes out as the estimated decline in June quarter 2020 GDP.

The good news is that all of these estimates are less than Treasury's earlier take in the Budget forecasts "indicating a decline in real GDP of around one-quarter" (p4 of the BEFU). Nothing wrong with Treasury's view at the time, but it looks as if we came through the lockdown levels faster than earlier seemed likely, and possibly with lower hits to business and consumer confidence than originally feared.

These estimates are also a bit less downbeat than the median forecast of the bank forecasters: I collected their picks for the June quarter GDP decline a week or two back, and the median pick was -16.8%; my own first stab at the decline had been 18-19%. So there's a real chance that June will have turned out rather less bad than we'd all thought. The latest government financial statements, for May, say that GST revenue was "not as adversely affected by lower economic activity as assumed in the GST forecast" in the BEFU, again hinting at a better June GDP outcome than anticipated.

None of this is to minimise the extent of the counter-cyclical fiscal and monetary task ahead. Even after a better than expected June, we face umpteen challenges including some permanent scarring, the sectors shattered by closed borders (tourism, education), and our exporters' prospects in a soggy covid-riddled world economy. But it's something that things could have been a lot worse.

It creeps ever closer

Back in May 2014, our Productivity Commission said that "s36 [of the Commerce Act, which forbids anti-competitive abuse of market power] should be reviewed, through a thorough legal and economic analysis that assesses reform options against the objectives of economic efficiency (particularly dynamic efficiency) and the long-term interests of consumers". Even before that, there'd been legal and academic debate about s36's usefulness or otherwise.

Six years later, after two MBIE reviews and many submissions and cross-submissions (including mine), we've finally got to the point where the government has decided that yes, s36 is indeed going to be changed, and in the process it will be lined up with its Australian equivalent. MBIE's announcement this week of the proposed changes is here, the Cabinet paper proposing them is here and the admirably comprehensive Regulatory Impact Statement done by MBIE is here (there's a particularly good explanation of the anti-competitive rorts that are at issue on pp 6-7 and why they're different from hard-nosed but fair competition). On present scheduling we should see legislation introduced in "early 2021" and hopefully passed sometime next year. 

s36 as it stands is flawed. As interpreted by the courts, and I'm quoting p4 of the Cabinet paper here and later, "a firm only takes advantage of its market power (and thus breaches the Act) if a business without substantial market power (but otherwise in the same circumstances) would not have engaged in the same conduct". But as the Cabinet paper says, "Some types of conduct (such as exclusive dealing) can harm competition when engaged in by a firm with market power, but are also commonly engaged in by firms without substantial market power, without harming competition. The current section 36 will likely fail to prohibit such conduct, since firms may engage in the conduct regardless of whether they have substantial market power". 

And apart from the logical defect in the "take advantage" test, it was effectively impracticable to apply: "the ‘take advantage’ test requires the development of a complex ‘hypothetical counterfactual’ market, in which the firm in question does not have market power ... [It] requires a number of (potentially arbitrary, unrealistic and/or subjective) assumptions to be made about what a hypothetical market in which the firm in question did not have market power would look like".

So we're going to move to the Aussie position, and flag away all the 'taking advantage' counterfactual speculation. Instead, the new s36 will cut to the chase: it will "prohibit firms with market power from engaging in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market. This would focus the prohibition directly on the anticompetitive nature of the conduct, and is likely to significantly decrease the cost and complexity of enforcement".

Significantly, MBIE's Impact Statement noted (p10) that "Now that Australia has changed its law, to our knowledge New Zealand is the only country requiring a strict causal connection between market power and the conduct in question". Consistency with other countries' practices isn't always a good idea, but when you're the only one out of step in the great march past of competition authorities, it was looking high time to dismantle that causal connection and go directly to an "effects test".

There are a number of other planned Commerce Act tidy-ups, too. The main one is that potentially anti-competitive deployment of intellectual property like patents has previously effectively had a free pass, as it appeared to have the protection of s45 and s36(3) of the Commerce Act. I say "appeared" because (a) "the exemptions have gone almost entirely untested in the courts" as the Cabinet paper says on p9 and (b) I've never been able to read s45 without losing the will to live. In any event IP-based rorts will forfeit whatever existing protection they've got.

The only thing I'd quibble about - apart from the usual irritation with government announcements, where they shelter what priority they propose to give the legislation behind the Official Information Act  - is the proposal to amend the Act "making it easier for the Commerce Commission to cooperate with other domestic agencies by sharing information it holds, subject to appropriate safeguards", as the announcement put it. The "appropriate safeguards" aren't specified yet: they'll need to be solid. The Commission has its own compulsory information gathering powers under s98 and can get search warrants under s98A: there should be a tough threshold test before any of that information gets passed around the wider public sector agencies. Maybe that's in mind, but if not it'll be worth raising at the - final, final, final? - round of Select Committee submissions next year.

Fiscal policy does its job

Before this Budget, just about everyone urged Grant Robertson to go for it (including me). The big initial question was always going to be: how large did the fiscal boost need to be?

Various bits of triangulation help here. In its pre-Budget economic scenario modelling, Treasury was running with an additional $20 billion (if the outlook didn't turn out too horrible) or an additional $40 billion (if it did). The most recent IMF forecasts suggested that the more downbeat scenario might be in play, so something closer to the $40 billion end sounds a plausible estimate of a minimum level of support.

Yesterday's Monetary Policy Statement from the Reserve Bank was using $30 billion as a working assumption: even fiscal support of that order would still see unemployment peak at 9% this year and GDP drop by 8.3% in the year to March 2021. The RBNZ also noted that its baseline scenario was relatively optimistic, and sketched two worse ones, so again you get $30 billion as a minimum and arguably more.

Against that background, the planned boost delivered, with $50 billion allocated to a Covid-19 Response and Recovery Fund (CRRF). I was especially pleased to see an extension of the wage subsidy scheme: supporting immediate cash flow is 90% of everything at the moment. Lending, or other assistance (eg the planned support for maintaining R&D), while worthwhile, are wholly secondary to the immediate priority of supporting income. And while I'd have been just as happy to see the existing extended without further qualification, I can see that targeting it to the most-affected saves some money and possibly helps maintain wider social support for what is the essential policy of first response.

It may be that not all this $50 billion gets spent. Elsewhere in the Treasury documentation the Budget Economic and Fiscal Update (the 'BEFU') says (B.3, p9) that "The main economic forecasts assume approximately $35 billion of discretionary COVID-19 fiscal support, alongside significant monetary policy stimulus. An additional economic forecast is also presented in which fiscal support is extended further, in line with the overall magnitude of the COVID-19 Response and Recovery Fund (CRRF)". But even $35 billion looks to be in the ballpark of what was needed - well done.

One thing that somewhat bothers me though is the degree of front loading. It's not bad, as the table below shows, with some $20.5 billion being spent under the March 17 package and the CRRF combined. And it's obviously hard to roll out many billions of operating expenditure at the drop of a hat - a lot of the programmes in the CRRF look to be works in progress, and I'm not surprised. But a large chunk of that $39.3 billion of still unallocated CRRF money needs to get spent in the 2020-21 year when it is most needed, and not in the years beyond.

As always with New Zealand (and overseas) Budgets, a lot of focus goes on those headline CRRF and fiscal deficit numbers. And yet again (as I said in 2019, 2018, 2017 ... ) the single most important indicator in the Budget material is not those headline eyecatchers.

Rather, it's the 'fiscal impulse'. That's a measure which abstracts from cyclical impacts on the headline Budget surplus or deficit, which can give a misleading impression of whether is is boosting or braking the economy. The fiscal impulse compares one year's Budget to another's, when both are stripped of cyclical effects on revenue and spending, and then asks how has the true underlying situation changed? If a (true, underlying) deficit has got larger, it's a boost. If a (true, underlying) surplus has got bigger, it's a brake. Here are this year's estimates, which (given the larger uncertainties) are even more best guesses than usual.

The fiscal impulse shows a very substantial fiscal boost of some 7% of GDP in the current fiscal year ending this June 30 - very much what was called for. But the fiscal impulse drops to only a small extra stimulus in the year to June 2021, which agrees with the time pattern shown in Table 2 above.  Next time we see these numbers, which will be in the pre-election fiscal update, I hope that more of the CRRF will have been brought forward and deployed in the critical months ahead.

What does the economic outlook look like? Just what you'd expect - a difficult year ahead, with (all going well) a strong recovery in the 2021-22 year. Again, though, you see the value of getting the full CRRF fund spent (and quickly). The main forecast (in bold) is based on spending $35 billion, and GDP drops by 1.0% in the 2020-21 year. Spending the full $50 billion turns a 1.0% decline into a small 0.6% increase. Every way you look at it, you get back to the same place - spend it all, and spend it soon,and make sure that execution of the programmes goes to plan. The other two forecasts, by the way, are 'things are worse' and 'things aren't quite so bad' flavours.

This is fiscal policy doing its job. Yes, nod to the long term (and important) objective of rebuilding the ammunition chest down the track. But put out today's fires first. And the fact that we have the ability to do it on this scale was generously acknowledged in the Budget speech today, where Grant Robertson said that "These were conscious choices that did not go unchallenged. But this strong fiscal position, built on the work of Bill English and Michael Cullen, now means we are much better placed than many other countries to use our balance sheet to cushion the blow of COVID-19 on the economy and to protect the wellbeing of New Zealanders. The rainy day has arrived, but we are well prepared". Our oppositional parliamentary system doesn't always make it easy to stick to multi-year fiscal discipline: today's Budget shows why it matters.

More support in difficult times

Highlights for me of today's Monetary Policy Statement:

• The official cash rate will likely be held at 0.25% "until early 2021" (p4). An eventual negative OCR isn't totally off the table, however: "If further stimulus is deemed necessary, additional options include ... setting a negative OCR" (p19)

• The bank aims to keep longer-term interest rates low by expanding its programme of bond buying -  the limit on its "large scale asset purchases", or LSAP,  will be nearly doubled to $60 billion. What caused what, and how much, isn't clear but net net, between the LSAP and everything else going on, longer term yields have moved significantly lower, and appropriately so, as shown below (from p18)

• The job of getting inflation to 2% or so is even harder now: "the economic impacts of the COVID-19 outbreak will reduce inflation significantly ...  Overall, CPI inflation is likely to be much lower by the end of this year, possibly below the 1 to 3 percent target range" (p8)

• It would help if the exchange rate was a good deal lower, but paradoxically we're looking relatively good by international standards, so people aren't actually that keen on selling it: "New Zealand remains in a relatively positive position given its relatively low number of COVID-19 cases, the relatively moderate declines in its export prices so far, and its strong fiscal position" (p7)

• The bank's expecting a big fiscal boost of around $30 billion on top of the $20 billion or so already committed (p8), most of which is the wage subsidy ($12 billion) and tax relief ($5.9 billion)

• The RBNZ is getting restive about lower wholesale interest rates not flowing through to retail level: "We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme (p2). Not enough has happened up to now - "So far, we have not observed the pass through of wholesale interest rate reductions to retail interest rates to the extent we might expect in normal times" (p19) - and there have been reasons for that - "This likely reflects a number of factors, including strong competition for deposits as market funding conditions deteriorated" (p19) - but we need to move on: "As the economy comes out of lockdown, we expect a lift in lending market activity and increased competition from banks to put downward pressure on lending rates" (p19). The bank has made it easier for banks to fund at (cheaper) wholesale rates than from depositors, and as a result "We expect our recent monetary policy easing to pass through more fully to bank funding costs and lending rates in the near future, and will be closely monitoring movements in retail interest rates and bank margins" (p23)

• The economic outlook is very difficult. No-one can do better in current conditions than sketch out some possible scenarios: here are the bank's (p10).You'll note that its baseline is relatively optimistic, and things could go worse. Even on the baseline view, it will be late 2021 or early 2022 before we're back to where we were pre-covid. The immediate outlook is for a 2.4% fall in GDP in the March quarter and a 21.8% fall in GDP in the June quarter, followed by a 23.8% rebound in the September quarter. The cumulative effect of those three is a 5.5% decline, which will take some time to claw back.

One thing that's occurred to me (and occurred to Bernard Hickey of Newsroom in the post-Statement media conference, too) is that I wonder why we don't do what the Reserve Bank of Australia does, and simply announce a target level for one or more long term interest rates: in the RBA's case, an 0.25% target for three-year Australian government bonds. The Bank of Japan has had a long-standing 0% target for the 10 year Japanese government bond. Adrian Orr's response was, as I understood it, to the general effect that the RBNZ didn't have enough control over the market to steer towards something precise. I dunno: at the end of the day, we're not especially interested in whether the LSAP programme is $60 billion or $40 billion or $100 billion. What we actually want is the outcome of at worst stable bond yields (despite the expected flood of new issuance) and ideally lower again. Why not cut out the focus on the middle-man process and cut to the chase of the desired outcome?

Go big

Next week we get the double header of a Monetary Policy statement (on Wednesday) and the Budget (on Thursday). Simple message for all involved: go for it, and go as big as you can.

If you haven't appreciated it already, I've had a look at how the impact of covid compares with previous setbacks. Here's the history of New Zealand's GDP growth back to 1980, and I've included for comparison the growth rates for the overall world economy and for the US. Data by the way come from the very useful (and free) World Economic Outlook database maintained by the IMF.

There's been nothing remotely like this in most people's working lifetime. While point forecasts in current circumstances are of only limited use, for what it's worth the IMF thinks that New Zealand's GDP will drop by 7.2% this year, even worse than the 5.9% they expect in the US, which has been as politically dysfunctional on covid as you'd have expected. The GFC is a tiny blip by comparison.

The good news - if you can call it that - is that the IMF is in the 'sharp V-shaped recovery' camp. But if I were Adrian Orr or Grant Robertson, I don't think I'd bet the economy on that assumption. At the Bank, I wouldn't be bothered about walking back from March's statement that "The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months". That was then: this is now. And at the Treasury, they recently showed us some scenarios based on $20 billion and $40 billion fiscal support programmes. The $20 billion programme was based on GDP dropping this year by 4.5%: the $40 billion responded to GDP potentially dropping 8% this year. If the IMF is indeed right, we need to be down the $40 billion end.

Not good enough

We're about to have the most important Budget in a generation. There's no question that Grant Robertson has inherited one of the most difficult challenges - probably the greatest - in living memory. What he does, or doesn't do, will define how, at a minimum, we cope in the near-term with covid, and, in all probability, will have longer-term repercussions on how our economy behaves and evolves. I wish him well. I doubt if there's anyone, from any end of the political spectra, who'd disagree.

So there's obviously an enormous public interest in what he's going to do on Budget day, May 14.

Normally, the people most interested in fiscal policy sign up for the 'lock up' - a vetted group of people, mostly the media but also the likes of bank economists and sectoral lobbyists - who on Budget day get access (usually mid-morning) to the Budget documents ahead of their release, subject to a time embargo. The deal is, if you've got a strong interest in fiscal policy, and Treasury agrees you're a player in that space, you get to see the stuff in a controlled environment, and with the advantage of the preparation time, you will be able to provide informed commentary, but (because of the agreed embargo) not before the Minister of Finance does his thing in the House. Works for everyone. I've been in lots of them.

But not this year. I won't be there: neither will the bank economists, the trade unions, the farming organisations, the investment managers. Here's what's happened.

Earlier this week I asked Treasury what this year's arrangements were going to be, given that the usual physical gathering in the Beehive was obviously out of the question.

Back came the answer that "the Minister and the Speaker of the House have arranged for a Restricted Budget Briefing to be held at Parliament for accredited members of the Parliamentary Press Gallery only".

I pushed back. I mentioned, for example, that the Fed has managed highly market sensitive press conferences over video conference, as you can see for yourself here. In response to the suggestion that video conferences are supposedly not secure enough for Budget-sensitive information, I mentioned things like Zoom's 'waiting room' and password protected access, and the fact that Cabinet apparently has met over video with no issues. And I also said that Treasury has been able to rely for many years on an honour system where lock-up attendees, in good Kiwi fashion, can be trusted to do the right thing. And don't give me grief over the (one, isolated) abuse of the honour system at the equivalent RBNZ lockups. We're generally a high-trust society, and I like that, and I'd like to see it continue.

Got me nowhere. Everyone involved was very nice about it, but where we've apparently ended is that the most important Budget in our lifetime is going to get immediate scrutiny only from a very small group of political insiders. New Zealand deserves better: we don't need this highly important event filtered through this small-mesh sieve.

This is not right. I'm perfectly happy to accept that I've got an interest here: being able to make an on-the-spot quick assessment of the Budget is a plus for me, as it is for everyone else in the usual lock-up. But my wider point stands: civil society is better served by wider access, not less.

Along the way I also made the point that these days, it's easy enough to acknowledge that a decision can be revisited, or as I put it to them, "there's only upside in saying 'we thought we had to tightly corral it, but now that we've thought about it, we can do this'". That fell flat, too.

Of all the Budgets in all the world, this is the one that should be most open to immediate analysis. The powers that be can, and should, rethink.