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?