The clock ran out

This week's 'mini Budget' was certainly down the minier end of mini, and understandably so. While I sympathise with a bias for action, and there was also a political commitment to be honoured, by the time the coalition was settled and portfolios allocated, there just wasn't enough time left on the clock to pull everything together and produce an up to date and internally consistent mini-thingie and its accompanying Half-Year Economic and Fiscal Update (HYEFU). As the HYEFU notes (p9) its forecasts were put to bed on November 6, but after that it lists a slew of events (notably the new government and its policies, and some important data releases including that weaker than expected September quarter GDP number) that haven't been able to be fully factored in. We'll have to wait for the Budget Economic and Fiscal Update (BEFU) next year for a complete and up to date view.

That said, there were a couple of interesting bits of analysis in the HYEFU. One important issue is whether the economy is still at or above capacity - if it is, there might still be lurking inflation risks emanating from domestically traded but supply constrained goods and services, if it isn't, then we might start looking ahead to eventual RBNZ easing. Here's the HYEFU take: it's reasonably encouraging from an inflation-pressure perspective. On its 'output gap' calculations, Treasury reckons we'll be going from 1% above capacity in June '23 to roughly at-capacity (-0.1% below potential output) in June '24 and to clearly below (-1.0%) potential output by June '25.

That all depends, though, on whether you can get a good handle on potential output - the maximum level of GDP growth we could manage on a sustainable basis - and I don't envy the Treasury analysts their task ("There is considerable uncertainty surrounding the degree of excess demand in the economy" - HYEFU p14). One big uncertainty is how much of the recent immigration-superpowered increase in labour supply feeds into what GDP it will produce. Another is likely productivity growth, which recently has been all over the place, as the graph below shows, and it would be a brave person who claimed to know where it was going next. You'd think there might be a chance that post-Covid business practices (working from home, greater flexibility, less command and control), might be about to deliver some kind of productivity payoff, but then again maybe not: after all, over the 13 years in the graph, we've only managed to eke out a 0.3% a year productivity gain, and only a small part of it came in the most recent few years.

Finally, for me one of the most important bits in any HYEFU or BEFU is the degree to which the fiscal policy stance is stimulatory or contractionary, and whether the stance matches with the state of the business cycle (a 'pro-cyclical' stance, making booms even boomier and downturns even gloomier, being the trap to avoid). Here's the latest stab at the 'fiscal impulse', the degree to which underlying fiscal policy is looser or tighter than the year before.

To me, and accepting that some of the spend was in response to North Island weather events, the fiscal policy stance for the 2023-24 year was inappropriately procyclical. In June '23 the unemployment rate was only 3.6%: the economy didn't need a fiscal boost. And it also put fiscal policy at odds with the tightening stance of monetary policy, which had started to apply the brakes from late 2021 and pressed harder and harder through 2022 and into this year. Monetary policy needs mates, as they say, but it ended up dancing alone.

Looking ahead, the economic outlook is not that flash: over June '23 to June '25, HYEFU expects GDP growth at a relatively slow 1.5% a year pace, and unemployment to rise from 3.6% to 5.2%. That'll be a tricky environment to be thinking about taking 2.4% of GDP out of aggregate demand (the estimate of the fiscal impulse for 2024-25). The new government will need to be careful not to turn a slowdown into something worse.

Competition and the coalition of chaos

Sounds like a Harry Potter movie doesn't it, and I couldn't resist using it as a title even though, for all the critical "coalition of chaos" knocking, there's actually a fair degree of overlap of policy ambition among the coalition troika, at least when it comes to the regulation and competition issues you and I are interested in.

To save you having to read them, I've worked my way through the two coalition agreements, National/NZ First and National/ACT, and picked out where competition and economic regulation might be up for a rethink under the new government. There's the odd regulatory thing I don't know about (for example, both ACT and NZ First want to junk the Therapeutic Products Act 2023, whatever that is) but otherwise this is a reasonably complete listing of what's likely to be in play. It's possible that some of the ideas in National's 100 point economic plan might yet see the light of day, too, so I've covered that as well.

I've included some personal comments: your opinion may vary.

One thing that commentators on the coalition agreement haven't picked up on is that in the 'Preamble' to both coalition agreements there's a reference to "introducing more choice and competition into social service provision". In practical terms the main immediate outcome is likely to be in education - the ACT agreement features "Reintroduce partnership schools and introduce a policy to allow state schools to become partnership schools" and "Explore further options to increase school choice and expand access to integrated and independent schools including reviewing the independent school funding formula to reflect student numbers" - but as a wider pro-competitive principle it's a good policy stance to start with. Monopoly public sector 'take it or leave it' provision is unlikely to be the best option of meeting everyone's needs. Cushy private sector incumbency doesn't work too well either, of course: while I can't see that it's made it into any of the coalition's priority lists, I quite liked National's proposal (number 47 in its 100 point plan) to "Allow KiwiSavers to invest in more than one provider, driving innovation, boosting competition and putting downward pressure on fees".

Stepping through the NZ First agreement:

"Establish a select committee inquiry into banking competition with broad and deep criteria to focus on competitiveness, customer services, and profitability" - I'm not hugely impressed by this, partly because the Commerce Commission is already part-way through its personal banking services market study and I can't see the point of duplication (accepting that the Commission's terms of reference may have been a bit narrow in the first place), but also because I don't think a select committee is the right forum. There's too much opportunity for grandstanding and for ritual oppositionism, while select committees are overwhelmed as it is and I don't see them being resourced well enough to handle a project of this size. Better options would be to either expand the Commission's market study or go the royal commission route: the Aussies made a lot of progress with their 'Hayne Commission'. But in any event bank CEOs and their teams and advisers can expect to be facing the third degree in some forum or other in coming months.

"Explore options to strengthen the powers of the Grocery Commissioner, to improve competitiveness, and to address the lack of a third entrant to remove the market power of a duopoly" - why not, especially in the area of supplier (i.e. grocery manufacturer) conduct. As the Grocery Commissioner recently said, "We are aware that a number of influential suppliers appear to be opting out of the RGRs’ [supermarkets'] wholesale offers and insisting on supplying direct to smaller retailers but at much higher prices, which is having a negative impact on retail competition". Whether the nuclear option of forced divestment to create the launching pad for a third entrant is on the table, who knows.

"Assess and respond to the impact that energy prices have on inflation including consumer led institutional improvements" - no, I don't know what that means, either, and it could be as innocuous as easier ways to switch suppliers to apply stronger competitive pressure (it works, as I experienced myself), or something along the 'New Reg' arrangement Australia has experimented with (described here), but it could also hint at a greater interest in control of retail prices.

"Investigate the threshold at which local lines companies can invest in generation assets" - my days of looking at requests for cross-sector involvements under the Electricity Industry Reform Act are long past, but insofar as I remember any of it, why not.

"Require the electricity regulator to implement regulations such that there is sufficient electricity infrastructure to ensure security of supply and avoid excessive prices" - seems reasonable, especially with the looming challenge of provisioning electric vehicles.

"Examine transmission and connection pricing to facilitate cost effective connection of new renewable generation resources, both on-shore and off-shore" - can't argue with that either, while hoping that it doesn't degenerate into the usual "you pay", "no, you pay" buckpassing.

"Require Medsafe to approve new pharmaceuticals within 30 days of them being approved by at least two overseas regulatory agencies recognised by New Zealand" (also word for word in the ACT coalition agreement) - as I understand it, a policy win for the New Zealand Initiative and/or its chief economist Eric Crampton, and wholly sensible. One of the bigger impediments across areas as diverse as building materials and medicines is the potentially anti-competitive barrier of unnecessarily high, or expensive, 'health and safety' non-tariff barriers, and we could usefully dismantle quite a few of them. In general we should efficiently free-ride on other respectable countries' testing or experience: I've always liked the idea, for example, of using overseas prices for telco services as a first sighting shot on what the local regulated price should be. Along similar lines National's 100 point plan had as number 32, "Strengthen competition for building materials with automatic approval for appropriately certified building materials from the US, Europe, the UK and Australia".

"Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand" - same again. Unnecessary 'credentialism' and conveniently incumbent professional licencing 'gatekeepers' need to have their wings clipped. Same sentiment in the ACT agreement with its "Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand including consideration of an occupations tribunal".

Turning to the ACT agreement:

"Legislate to improve the quality of regulation, ensuring that regulatory decisions are based on principles of good law-making and economic efficiency, by passing the Regulatory Standards Act as soon as practicable" - applehood and mother pie, and who'd disagree. Whether it would extend as far as a rethink of say Part IV of the Commerce Act, where I've always felt there may be less heavy duty alternatives to our rate of return regulation, we'll have to wait and see. And while it might be implicitly tucked into that "economic efficiency" reference, I'd like to see an explicit criterion in any eventual Act that would require any proposed regulation to be assessed for its impact on competition and consumer choice.

"Establish a new government department, required to assess the quality of new and existing legislation and regulation, funded by disestablishing the Productivity Commission and consolidating some regulatory quality work across the public sector where appropriate" - the country has not gone into mourning over the demise of the Productivity Commission (though as the productivity challenge hasn't gone away I personally would like to see something resurrected along the solid lines of the UK's Productivity Institute), and if the money is used to fund better regulation, why not. 

"In consultation with the relevant Minister, carry out regulation sector reviews, which could include the primary industries, the finance sector, early childhood education, and healthcare occupational licencing, in each case producing an omnibus bill for regulatory reform of laws affecting the sector" - a broad agenda which could encompass not just the benighted CCCFA (coming up next) but also ComCom's payments system regulation. Note too yet another welcome reference to tackling potentially overprotective professional qualification regimes.

"Rewrite the Credit Contracts and Consumer Finance Act 2003 to protect vulnerable consumers without unnecessarily limiting access to credit" (which also featured in the National Party's 100 point plan as number 48, "Cut financial red tape that is stifling investment, including significantly reducing the scope of the CCCFA which has restricted access to credit") - pretty much everyone accepts that successive tinkering with the CCCFA hasn't left us in a good place. Well-meaning attempts to protect the vulnerable ended up with lenders emptying people's waste baskets looking for receipts for Netflix subscriptions.

"Amend the Overseas Investment Act 2005 to limit ministerial decision making to national security concerns and make such decision making more timely" - completely reasonable. We already have one of the more restrictive overseas investment approval regimes by OECD standards, as shown in the graph below, and we need to lighten up if (among other things) we want another supermarket entrant or we want to attract some of the vast global pool of private equity money that's currently sloshing around looking for infrastructure opportunities (in particular for decarbonisation). We don't need any repeats of a Minister telling an overseas pension fund that they can't take a stake in a New Zealand airport. In the National Party's 100 point plan, they had as number 66 a very specific reason for liberalisation, "Amend the Overseas Investment Act and Income Tax Act to give investors certainty to invest in Build-to-Rent projects", which has since made it into the government's 100 day action plan, but hopefully the Overseas Investment Act will be freed up to benefit a wide variety of potential investors.

"Reform market studies introduced by the Commerce Amendment Act 2018 to focus on reducing regulatory barriers to new entrants to drive competition" - I can't say I like the look of this, for various reasons. For one thing, it's too early to be tinkering with a regime that's still new. More importantly, it looks as if it might be intended to limit the scope of future market studies solely to reducing regulatory barriers, which would be a mistake. There will be instances (such as the petrol stations) where the big competition issues are primarily ones of market power, not regulatory barriers, and the Commission shouldn't be barred from looking at them. It's arguable that the threshold test - "in the public interest" - for the Commission in s50 or the Minister in s51 to kick off a market study is too broad, but it's better than a threshold test that would be too narrow. On a more charitable reading, perhaps the "reform" will require the Commission to make sure that it uncovers all regulatory barriers in a study, but on the other hand they've been doing that quite well already (eg the thicket of resource consent, land planning and Overseas Investment Act hurdles to new supermarkets), so unfortunately the more uncharitable reading of an overrestrictive rollback looks the way to bet at the moment.

"Immediately issue stop-work notices on several workstreams, including Three Waters (with assets returned to council ownership)" - the 100 day action plan includes "Repeal Labour’s Three Waters legislation", so that's underway as a first step. What happens after that? National's 100 point plan had included (as number 68) "Restore council ownership and control of water assets, with strict rules for water quality and investment requirements" and (as number 69 in a welcome pinpointing of the current dynamic inefficiency debacle) "Introduce a requirement for water service delivery models to be financially sustainable, so that future generations don’t inherit outdated or failing infrastructure". Perhaps that can all be done under the remit of the current Water Services Economic Efficiency and Consumer Protection Act 2023, which installed ComCom as a sectoral regulator very much along the lines of its role as an electricity lines regulator (and which I'd presciently argued here was likely to be a better plan than Three Waters). Whether that will be timely enough - there's a rather leisurely timeframe in the Act for introducing regulation - or effective enough remains to be seen. ComCom can set investment paths, but with something like $150 billion worth of overdue maintenance to be paid for, it's still (however much you might like to stick it to councils for their previous pusillanimous water mismanagement) not obvious that they're in a financial position to pay for it.

Finally, there was a chance that a more business-friendly, deregulatory government might be minded to roll back some of the features of our existing competition regime. But nothing's been unwound, so that's something. On the other hand nothing's been advanced, either, even though the Commerce Act is now looking a bit shopworn. Understandably the negotiators had bigger things on their minds.

If I've missed anything, let me know and I'll happily update.