Too slow? I don't think so

Ignoring the predictably partisan knee-jerk assessments from the usual suspects, there were two broad camps of reaction to yesterday's Budget. 

One was that it didn't actually do enough to boost growth, its signature objective. The accelerated investment incentive is fine, especially given that part of our productivity problem relates to New Zealanders working with less capital equipment than their counterparts overseas, but it's having to do a lot of work on its own. Yes, there were other Budget things that will help (notably increased spending on infrastructure) but overall it didn't deliver an adequate pro-growth punch.

The other reaction, from what you might term the fiscal 'hawks', was that it didn't move fast enough to close the fiscal deficit. It's easy to ramp up public spending, run deficits, and borrow, but quite a lot harder to cut back, get the books into surplus, and pay back some of the debt: there's a ratcheting effect where public spending boosts tend to be larger than any subsequent windbacks. Retrenching this time round hasn't got any easier: on the Budget projections there's only a minuscule surplus in the fiscal year to June '29, and even if we get there (and a $0.2 billion surplus is well within any margin of measurement or forecasting error) that's still four years away. 

There was probably no way Nicola Willis was going to simultaneously satisfy both the pro-growth and pro-windback camps, and I think it's fair to say that both are far from gruntled.

My own reaction is that, while I'm sympathetic to the general point that we need to rebuild the fiscal books, I think Willis is doing it at what, in current circumstances, is a sensible pace, and the more rabid fiscal hawks should back off.

Why do I think that? Let's look at the 'fiscal impulse' - whether fiscal policy in any year has become more expansionary or contractionary compared to the previous year*. This year I was somewhat concerned that an over-hawkish drive to an eventual fiscal surplus might be too aggressive, and risk further damaging an economy that is still in a somewhat fragile state. I also wanted to see whether fiscal policy was playing nicely with monetary policy: as the RBNZ said at its latest OCR review, there are "downside risks to the outlook for economic activity and inflation in New Zealand", and it wouldn't be the best of ideas to have fiscal policy braking the economy too hard.

Here's what the fiscal impulse looks like (from p67 of the Budget Economic and Fiscal Update, the 'BEFU'). Bottom line, the pace of withdrawing fiscal support looks pretty sensible to me. According to the BEFU forecasts, GDP growth in the current fiscal year to June '25 will have fallen by somewhere between 0.3% (expenditure measure of GDP) and 0.8% (output measure). and by a stonking 1.9% in per capita terms. In those circumstances what has turned out to be a modest fiscal boost makes complete sense.

For the year to June '26, there's a marginal fiscal boost which is macroeconomically speaking irrelevant, and even if it were a bit larger, it mightn't be such a bad idea given the uncertainty around the economic outlook. And then there are three years of moderate but meaningful windback of fiscal policy. You may have your own views, but I can live with that. 

In passing, there were a couple of initiatives in the minutiae of the Budget that I particularly warmed to. If you're interested in exactly what new stuff is planned, by the way, the place to go is the 'Summary of Initiatives' document.

Statistics New Zealand is getting $63.8 million over the next four years which "provides funding held in contingency to deliver eight updated macroeconomic measures by the end of 2030, to meet new international standards and better measure changes in the economy. Funding will also deliver new monthly indicators by 2027 to provide timely updates on economic activity", and another $16.5 million to "deliver a more frequent, reliable measure of inflation by moving from quarterly to monthly Consumers Price Index (CPI) reporting. Data will be collected on a monthly rather than quarterly basis, with regular monthly CPI reporting delivered from the beginning of 2027". We've been falling behind other OECD countries (and indeed behind some poorer non-OECD economies) in terms of the timeliness and range of our macroeconomic data, and this is a long overdue revamp. 

The other was the $130 million allocated to social investment initiatives. 'Social investment' is jargon for social support programmes targeted on 80:20 rule lines to those most in need, and typically delivered outside the traditional one-size-fits-all centralised social welfare spending channels. I wrote a bit abut it here, and I think it's a highly promising and progressive approach. The new Social Investment Fund "will use data and evidence to guide investment in effective, outcomes-focused social services. The Fund will invest in new programmes and in changes that strengthen existing arrangements". The Budget also said that "This initiative also provides departmental funding for the oversight and delivery of the Fund". This may just be a statement of the bleeding obvious, but I also very sincerely hope that it isn't code for the Wellington disease of excessive micromanagement of anything new or different.

*The fiscal impulse can be a bit of a heffalump trap to interpret. Suppose in Year 0 the government is in fiscal balance. In Year 1 it goes into deficit and buys 100 widgets, supporting widgetmakers. In Year 2, it is still in deficit but buys only 60 widgets. The fiscal impulse will show a reduction in the scale of fiscal support, from 100 to 60 widgets. At the same time, while less so, fiscal policy is still supportive: there are still 60 widgetmakers who benefit from the residual purchases. 

The New Zealand Economic Forum - Day 1

The University of Waikato's New Zealand Economic Forum 2024, on the theme of 'A briefing to the incoming government', kicked off in Hamilton last Thursday with a speech by Finance Minister Nicola Willis (below).

Nothing headline-making, but solid stuff: I liked the aim to lift our growth rate by removing go-slow regulation, the plan to have fast one-stop consenting for major projects, and to have more 'social investment', meaning prioritising social spending on the groups most at risk of being stuck in persistent disadvantage. In Q&A, someone asked about investment plans: there's apparently going to be a coordinated 30 year pipeline of projects, and about bleeding time. There are decision-making models maintained in the public sector that let you assemble optimal investment portfolios, and they badly need to be deployed, however belatedly, to make our infrastructure spend all that it can be. Chatting to another attendee afterwards, he wondered if the benefits and costs you need to feed into those models were reliable enough to avoid garbage in, garbage out results, but anything's got to be better than the lack of coordination we've had up to now.

The next two topics - agriculture and health - weren't my thing, but they had their moments. In agriculture, I'd never heard of AgriZeroNZ before: "A partnership between the New Zealand government and major agribusiness companies, we're helping farmers reduce emissions while maintaining profitability and productivity". Good stuff. In health, I heard a lot of sense from Professor Des Gorman. He said that we don't have a 'health' system, we have a disease and injury management system, paid for on annual levels of activity, which is self-evidently not ideal. He argued for a better 'tight, tight, loose' system focused on value for money: it would be tight in defining the health outcomes you'd like to see, tight in measuring what providers actually achieve, but loose or agnostic about what sort of providers you use. For those who would cry 'privatisation' of the public health system, his answer is that the system is largely private already, notably including your local GP practice. And for those worried about those dreadful private providers making a profit, in a competitive value-for-money system the answer is, "They're delivering more for less. What bit don't you like?".

After lunch we had a choice of 'Demographics are history' or 'Running tax differently', and my inner nerd chose tax. Graham Scott (gamely filling in for the unavoidable late withdrawal of Max Rashbrooke, also contactable here) reminded us that tax has its own comparative advantage - it has things it can and cannot do - and threatening to load it with multiple policy aims risked taking us back to the bad old days when we had a mad patchwork of specific sales taxes and other distortions and complexities. PwC's Sandy Lau was mostly happy with things as they are, though wondered if we need capital gains taxes, if only to reduce our currently disproportionate reliance on personal income tax. And Victoria's Professor Lisa Marriott's main point was over enforcement: she felt genuinely ratbag behaviour wasn't being sufficiently prosecuted by the IRD. Not only were people getting away with malfeasance, tax compliant businesses were being put at a competitive disadvantage relative to the scofflaws.

The session on 'Social investment: What difference will it make', led to a strong consensus that (a) there is a large group of people who suffer from persistent disadvantage (b) current social policy isn't cutting the mustard (c) by finding out what these people most need we can get better much better results especially if we focus on value for money from what we do and (d) we should regard what we do as an investment in people rather than as a cost. As Merepeka Raukawa-Tait put it, the time for wasted spending is over. Subsequent speakers pointed to a dramatically successful example that Maria English gave us, where providing tailored housing to a particular person saved nearly all of the very expensive 100 nights a year they'd previously been spending in a hospital bed. The session made complete sense to me, and I was quietly bemused how the winds have changed since Bill English (Maria's dad) championed this very approach, and got roundly rubbished for it.

My initial reaction to 'Trade: Dealing with a divided world' left me worrying: there's been an end of the "golden weather" of increasingly free and rules-based trade. Now there's fragmentation, rules flouting, disempowerment of the World Trade Organisation, protectionism, and 'security' concerns (real and paranoid). It very much felt like the trade front of Cold War II. MFAT's Vangelis Vitalis replied to my downbeat tweet that "I hope the conclusion left you feeling  more positive, i.e. we have a plan, agency, new options & advantages in key markets and are determined to protect and defend our hard won benefits through FTAs", and that we are showing "Policy entrepreneurship in international trade policy". He'd mentioned, for example, us successfully taking Canada on about their dairy trade protectionism. All fair comment, and it's good to know we're fighting our corner, but it's still a trickier wicket to bat on than it was before.

And the day wrapped with a session chaired by Steven Joyce on 'Monetary policy: Controlling what we can control'. Grant Spenser, ex deputy governor at the Reserve Bank, reminded us that the RBNZ, when it last reviewed how it had been going, found nine things it could work on, and wondered how they were getting on with them: he also noted that there appeared to be quite a blowout in operational spending and in headcount over the past six years. He also wanted to see more of a challenging culture at the Monetary Policy Committee from the independent members. I totally agreed: Australia's moved in that direction recently as well, with a boost in expertise and a requirement that independent members put their view into the public domain at least once a year. Bryce Wilkinson revisited some of the territory he'd covered in his publication co-authored with Graeme Wheeler, 'How central bank mistakes after 2019 led to inflation',  reminding us that monetary policy everywhere was relied on as being more of an exact science than it actually was, and that central banks made very poor inflation forecasts, even though that was their day job. Bryce said the global financial markets had also missed what was developing. And Henry Russell found himself in something of the spotlight given that the ANZ Bank had just made a big off-consensus call that the RBNZ would hike rates again (two moves of 0.25%), its reasoning being that the RBNZ had indicated back in November that it had little tolerance for any upside inflation risks, but they looked like they were getting some.

The monetary policy panel: Henry Russell (ANZ Bank), Bryce Wilkinson (Capital Economics / The New Zealand Initiative), Grant Spencer (ex RBNZ, Victoria University), Steven Joyce at the lectern

There was a really interesting discussion after the speakers' opening remarks, including around the ANZ forecast of hikes to come. Bryce thought that interest rates were now where they out to be on a Taylor Rule basis, and also that money supply growth had slowed down to very little growth at all (the latest 'broad money' measure, for example, is up only 3.6% on a year ago), both of which argued against hikes. Grant felt that with inflation already down quite a bit, maybe it would be better to hold and stay at current rates for a bit longer to see what happens. Henry, however, said that arguably a global disinflation supporting tailwind has blown out, that domestic inflation is still not good and might surprise on the upside again, and that while the pricing indicators in the ANZ business survey have stabilised, it was an open question whether they had stabilised at a level consistent with the RBNZ's inflation target. Policy issues raised but unresolved for another day: whether unconventional monetary policies (like quantitative easing) had been worth it; how monetary policy should respond to supply shocks; and whether the RBNZ ought to be both the setter of monetary policy and the financial prudential authority. Evidence from overseas is mixed, and against the canonical practice of economists having an answer to everything, I can't say I've got any clear opinion, either.