Wednesday, 11 December 2019

Give that man a DB

Everybody from blind Freddy upwards has been telling this government, and previous ones, to get on with fixing New Zealand's gross infrastructural deficiencies.

"We should pull finger and get the hell on with it while the going is still pretty good", I wrote just over three years ago. "Roll out the infrastructure we need, and pull finger about it while you're at it", I said over two years ago. And apart from an unfortunate predilection for 'pulling finger', I was right, as was everyone else who has been banging on about it.

So all credit to Grant Robertson, who at today's Half Yearly Economic and Fiscal Update ('HYEFU') has done precisely that: an extra $12 billion into infrastructure. It was, from an economic perspective, completely correct: we need the choke points fixed, borrowing costs are at historical lows, and monetary policy has been driven into ever more grotesque distortions because fiscal policy wasn't carrying its share of the inflation-boosting load. Show me someone who disagrees with this boost, and I've a better than average chance of showing you a nutter.

To be clear, I'd say well done to whoever held the portfolio: I try to be non-partisan, and I'll give credit where it's due. In this case the economics said, go for it, and he did. Robertson also ran a bit of a political risk: "you can trust us with the public purse" was an electoral asset, and he's been prepared to face the "you promised a fiscal surplus and you blew it" flak (you'll have seen it's already flying) for the greater good. Good call.

There are practicalities that might intrude. With this spend-up, there is are risks that any old vanity project will get a green light. There are probably capacity constraints, meaning good intentions won't translate into diggers on sites, and hence and otherwise you'd want to see some thought given to (say) apprenticeships in the engineering and construction trades. There could be other constraints: it's a wild guess, and probably totally unrelated to whatever might be the Commerce Commission's next market study, but I wonder what are your chances of buying construction materials at a reasonable price, if  you were minded to buy a lot more of them? And the infrastructure spend-up is going to make overall expenditure control trickier: "you could find $12 billion for roads, but you can't find money for [insert allegedly deserving cause here]". For all that, it's still a good plan.

The other interesting thing from today's HYEFU was the update on whether fiscal policy is likely to boost or brake the economy. Yes, I know I go on about this, but for good reason. Most of the fiscal coverage is from a vested interest point of view - will my pretties get their share of the lollies - and the overall national interest doesn't get enough of a look in. But we all need to know whether on balance, overall, the government is on an austerity tack or whether it's adding to the national spend-up.

The answer to that question - and when I say 'answer', I have to confess it's the best we've got, rather than an outright humdinger of a clearcut answer - is given by Treasury's estimates of the 'fiscal impulse'. Here they are. Bars above the line say that fiscal policy is supportive, below the line it's contractionary. The blue bar is the best one to look at.

Treasury's commentary (p16 here) says that
Compared to Budget Update [last May], the fiscal impulse in 2019/20 and 2020/21 is now more positive (0.9% and 0.3% respectively, up from 0.0% and -0.2% previously). The change in the 2019/20 impulse largely reflects operating spending shifting from 2018/19 to 2019/20. The change in the 2020/21 impulse reflects increased capital spending.
I don't blame you if you're wondering what's being said here. Unpacked, there's good news and bad news.

The good news is that fiscal policy is going to be more helpful over the next year or two than originally planned, which, given that the current preponderance of risks in the global economy is tilted to the downside, is a good precautionary move, as well as taking the heat off the Reserve Bank and starting to chip at our infrastructural problems.

The bad news is that $12 billion of extra infrastructure spend, which you'd think would make quite an impact, will take forever to kick in. Here's the profile (from p13 here).

Some of this is inherent in the nature of infrastructure spending: you can't go out tomorrow and start hacking away at Transmission Gully or a second Auckland Harbour crossing. Some of it is down to unnecessarily complex and slow planning processes. Some of it is down to governments not being ready (from a cyclical management point of view) with the proverbial 'shovel ready' projects or (from a longer term investment perspective) not having a coherent portfolio of projects thought through well ahead of time.

But however you parse it, you can announce $12 billion today, but only $3.7 billion is actually going to be spent over the next three and a half years. So while Treasury talks about increased capital spending contributing to a fiscal boost in 2020/21, the effect is quite small because infrastructure is harder to get moving than a teenager with an attitude.

I'm not the first to say this, but there is a ever stronger case building for a non-partisan agreement on a core programme of infrastructure spending. We shouldn't be in a position where overdue investment happens only when cyclically opportune; we shouldn't be in a position where one government's 'holiday highway' is the next government's 'road of national significance'; we shouldn't be reacting, after the event, to stresses that have become evident because we haven't had the wit to preempt them. And on the supply side, we won't have the range of contractors we'd like to have to build the projects we need, unless they get the comfort of a pre-announced schedule of potential contracts. We risk being hostage to the big few who can ride out the dry years.

But enough of the quibbles. Did fiscal policy step up to the plate? Yes. Did we get more real about infrastructure? Yes. Does that man deserve a DB? Yes.

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