Monday, 28 June 2021

So far so good. What next for fiscal policy?

If the Plague had indeed broken out big time last week in Wellington, it would have taken out a high proportion of the country's economists.

No, don't be like that, and put that champagne back in the fridge - fingers crossed, our Sydney visitors don't appear to have spread the pandemic here. But if they had, there was a combo of the Treasury / Reserve Bank workshop on fiscal and monetary policy in the wake of Covid (Tuesday), and the annual shindig of the New Zealand Association of Economists (Wednesday and Thursday, though Thursday got cancelled when Level 2 was brought in). Just about everyone with an interest in macro policy and economic research were all in the same lecture halls at Vic - a very short virus-exposed walk from Rydges Hotel, one of the 'locations of interest'.

Tuesday's workshop (full programme here) kicked off with a keynote, 'New challenges for macroeconomic stabilisation policy: The role of fiscal policy', from Treasury Secretary Caralee McLiesh. What I took away was that we've done well through Covid: as she said (p3) "Overall these [supportive monetary and fiscal policy] interventions, alongside a health response that successfully eliminated COVID-19 in New Zealand, have been effective in supporting the New Zealand economy, which has outperformed our forecasts since the beginning of the pandemic". By international standards we've ended up in a good place, and pushed the fiscal lever hard to get there, as these graphs from her speech show.

Fiscal policy fired up quickly (even if a begrudging part of me wants to add "for once"), and got the support out in literally hours, in some cases, to applicants for wage subsidies. And there's been a corresponding re-assessment of how well fiscal policy can help stabilise an economy against cyclical shocks, with our wage subsidies and the Australians' and Americans' cheques-in-the-mail approaches all clearly effective, and in a timely way.

The supposed pre-Covid consensus that monetary policy was the best cycle stabilisation tool and that fiscal policy would be too lumbering to do any good, has been rather overstated. It was never that clearcut: monetary policy, after all, famously operates through long and variable lags, so isn't necessarily the quick fix some folks touted, and fiscal policy isn't always on a 'turn the first sod in twenty years' Transmission-Gully-style timetable. But in any event the new consensus is that they can both be deployed to good effect early in the piece.

Some commentators see a new, bigger role for fiscal policy as potential over-reach. Michael Reddell in his blog piece on the workshop, 'Fiscal policy in the wake of Covid', felt that "When a half-baked loaf is finished cooking it can be a fine thing, but this loaf seems to need a lot more work before New Zealanders should be rushing to embrace a much more active role for fiscal policy or a lot more public debt". The NZ Initiative's Eric Crampton in 'Govt making the case for higher levels of debt for longer' said that "If the core of the public sector is happy with higher debt levels, despite clear failures in ensuring that funded projects pass any reasonable cost-benefit assessment, greater prudence is needed in how that debt is issued". 

The exact scale and scope of future fiscal activism is still in sum very much up in the air, though if McLiesh is right, and we are indeed headed into a world of permanently lower interest rates, then I hope one outcome is that we pull finger and get on with the overdue infrastructure we need and which have now become significantly cheaper to finance. Which I've been saying for at least the last five years ('A once in a generation opportunity'). 

In  any event you don't have to just sit there and take what's dealt to you in the fullness of time. Treasury is reviewing our macroeconomic frameworks, and you'll get your chance to put in your tuppence worth. There's an e-mail address at the site if you want to get involved.

1 comment:

  1. I don't like higher equilibrium net debt levels, but that isn't an argument against using debt for necessary infrastructure. That stuff can be funded in the same way that the Auckland Harbour Bridge was funded: set a bond that's paid off by user fees. Make sure there's no recourse to either central or local government if the user fees wind up being insufficient to pay off the debt. Then it shouldn't even count against prudent net debt limits.


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