New Zealand has fallen deep into a per-capita recession and policymakers are likely to make it even worse with contractionary fiscal and monetary settings.
That was the conclusion of one New York-based economic strategist attending Waikato University’s Economics Forum in Hamilton a few weeks ago.
Dimitris Valatsas, the chief economist at US advisory firm Aurora Macro Strategy, said he found the presentations by NZ’s top policymakers to be “bizarre”.
“New Zealand has ample fiscal space to support the economy and it seems bizarre to me that it is not being used — and even more bizarre that the Government feels there is a need to reduce spending right now,” he wrote in an email.
In a later note to clients, he suggested shorting the NZ dollar and buying Government bonds.
“Policymakers have locked themselves into procyclical monetary and fiscal policy which, while deepening the slump, should support bonds,” it said.
Economic orthodoxy would suggest that governments should step in to provide support during downturns and save surpluses during periods of strong growth.
New Zealand has managed to do the opposite. The Labour-led Government threw huge amounts of money into the economy to offset the covid downturn.
And, it worked all too well. Economic activity came roaring back to life but Labour could not bring itself to switch off the support even as the ‘check engine’ light started flashing.
Surplus or stabilisation, that is the question?
Caralee McLiesh, Secretary to the Treasury, gave a speech at the forum arguing in favour of reducing government spending despite the downturn.
“Although the economy is expected to slow in the next two years, our assessment of current macroeconomic pressures and that the current fiscal deficit is structural meant we recommended … that the Government should prioritise a return to surplus”.
Interestingly, Finance Minister Nicola Willis has herself cast doubt on whether the Coalition Government will be able to deliver on its plan to return to surplus in the 2026-27 year.
She told Bloomberg she was not “optimistic” about the chances as the surplus position was “challenged”.
McLiesh said there were likely to be situations in the future when fiscal policy will be needed to stabilise the economy but any support should be “timely, temporary, and targeted”.
That may mean relying more on automatic stabilisers, which are linked to the economic cycle, and less on infrastructure and core Crown spending which are harder to withdraw.
“The asymmetry of fiscal policy (it is easier to spend than it is to cut) reinforces why fiscal policy should be used judiciously in macro stabilisation,” she said.
Valatsas, our New York macro-economist, thought this was a policy mistake that would result in lower growth for longer.
“We perceive virtually no opposition to this austerity political narrative among policymakers at present, meaning that fiscal headwinds are likely to persist until the next election”.
Some economists might argue the Government should hold spending steady, even if it means adding to the national debt, and wait for the economy to catch up.
But McLiesh was sceptical of this approach. Higher interest rates make it harder for a country to “grow its way out of debt” and the outlook on future growth was highly uncertain.
“Between population ageing, climate change, a global productivity slowdown and geopolitical fragmentation, prudence suggests we should borrow only what we could afford to repay in a modest-growth future”.
“We should not rely on favourable debt dynamics going forward,” she warned.
That said, she noted NZ could theoretically recover from debt levels of around 90% of GDP — five times higher than the current 18% and three times higher than the 30% ceiling.
An interesting dollar
Valatsas wrote his research note prior to the Reserve Bank’s decision last Wednesday, in which it held the Official Cash Rate at 5.50%, while the fear of further hikes was still in the air.
He felt this would be a mistake and worried the RBNZ had been overly influenced by being blamed for the inflation spike, despite being one of the first central banks to react.
“This means they suffer from a hawkish bias that has only been exacerbated by the new Government’s legislation moving the RBNZ to a single (inflation-targeting) mandate”.
In an email, Valatsas said he told a couple of government ministers attending the conference they would “bitterly regret” this decision when the labour market cracks.
Valatsas correctly predicted the Monetary Policy Committee would keep rates steady at the February meeting. Like most, he expects cuts to begin in the second half of the year.
Fixing the current account deficit, which was 7.5% last year, should be a higher priority.
“Though the New Zealand fiscal balance sheet is exceptionally healthy, the country itself remains highly dependent on international financing,” he said.
“Policymakers instead seem to be adopting a wait-and-see approach, hoping that inbound international tourism and international students will recover”.
In lieu of a policy strategy, it would eventually be a weaker New Zealand dollar that would do the work of narrowing the deficit.
73 Comments
"Edit - I've deleted my comment as it just adds to the is vs them arguments. This is worthy of discussion, what should the govt be doing? "
Great question to focus the discussion. The discussion should be focused on finding solutions to the current challenges that the country is facing. Focussing on policy solutions is being constructive.
If there was only one thing the government could do to improve the lives of most New Zealanders, what should it be?
Note: there are numerous challenges facing the country and not all can be solved, but if we identify the most important issue that impacts most of the country and find a solution for that, it may be doable to achieve one if policymakers remain focused.
Someone a year or two ago likened Orr style as as swinging wildly from oversteer, to understeer, and back again. If you couldn't see this and the lack of financial reality that extended levels of once in a lifetime cheap debt created, then you are indeed dumb.
Example. Got a call from an agent yesterday from an auction I attended in 2021. House was a future bowler, asbestos, no insulation, etc - nice but basic. Person overpaid by a huge amount, circa $1.5-2m range. Even the agent had a shocked look on their face at the time. Title shows a mortgage, now wants quietly sold and expects their money back. They are going to burn $1.5-2m to sell, or hold for the next 50 years.
Popcorn
"Got a call from an agent yesterday from an auction I attended in 2021. House was a future bowler, asbestos, no insulation, etc - nice but basic. Person overpaid by a huge amount, circa $1.5-2m range. Even the agent had a shocked look on their face at the time. Title shows a mortgage, now wants quietly sold and expects their money back. They are going to burn $1.5-2m to sell, or hold for the next 50 years."
Just out of interest, what is the address of this property?
'Economic orthodoxy would suggest that governments should step in to provide support during downturns and save surpluses during periods of strong growth.'
Yes it does, Dan. But you are a journalist, and should challenge any mantra as to whether continuance-of-belief is valid. That response worked on the way up the growth-chart - obviously that experience is of no use whatsoever over the top, and on the way down.
Mora's interview of Tim Heath (RNZ Sunday) should ring alarm bells; the biggest question is always: Why?
Next step back. perspective-wise.
She assumes 'BAU', and 'cyclical'.
This ain't neither. This is humanity has hit the Limits to Growth (listen to the Mora/Heath interview; Mora fails to ask 'why?' - but ask yourself as you listen. Heath is clear; this is a one-way trip, with implications...
The ferries themselves were costed , and turned out to be a bargain.
The infrastructure works were fully costed at the end, a large increase to deal with climate and earthquake issues . As you are seeing with every other project in Wellington.
There is valid criticisim that the original estimates were way too low.
It was starting the ill conceived ferry project that cost $500. Not stopping it.
I applauded Nicola Willis when she did that. It was a notice to the endless dreaming of the bureaucrats who start off with say a $500million suggestion. It ends up with a $4billion cost. Again and again. And you can never stop anything because it's already started. Supposedly.
I am sure we will end up with a good ferry system. Without the millstone of cost.
That will kill main line rail freight in NZ except for possibly between Auckland, Hamilton, and Tauranga.
The problem isn't the ferry costs, but the landside port upgrades because seismic strengthening for the port facilities was so expensive. As Richard Prebble wrote - that is where the government attention should have gone.
Interisland rail ferries: Regulation is the problem behind the high cost - Richard Prebble - NZ Herald
Agree with maybe removing rail from ferry capabilities. However the terminals are ancient, Pictons is likely unusable in a few years. The current boats are breaking down all the time without any replacements planned now, which will take years to design and sign contracts for. Lives are at risk as is the economic cost of not being able to transport things across the straight.
There is no plan for a replacement project. When one is created it will be too late now. And guess what, guarantee it will cost around $3b-$10b as the cost to build infra always goes up.
what rail freight actually goes interisland anyway?
that couldnt also go on a boat from Tauranga or Napier to Christchurch or Dunedin
and $3000 or $4000 million is actually a very large sum of money to be spent on a service that already loses the thick end of $1000 million p.a.
Time for a very serious overhaul of the rail service because Palmerston North to Wellington is an unprofitable dog even when the largest load are logs to Wellington wharf - which could go to Napier and improve the profitability of that route
Then someone at WCC can focus on the unprofitable wharf operation that we currently have
Its all about Auckland - Chch overnight, well within 24 hours.
Kiwirail has already ceded the most time sensitive fregiht to road transport , its twisting rails cannot compete with the billions spent on upgrading roads. but it still manages 2 trains full a day between Picton and CHch . virtually all of it off the ferries.
A good chunk of that would disappear if you added another 2 -4 hours transloading at each end. Kiwirail may use trucks to spring creek , save the rail climb out of Picton, might claw back 1/2 hour. Truck form Palmerston North ? maybe, it probably would mean the end of Wellington port , everything going to Napier.
Kiwirail might keep the Aratere going , ditch passengers and just have rail and their own transloaded freight carried. No road drivers onboard , probably the only acceptable safety move on a 40 year old ferry . no great loss to them outside the school holidays.
I think Nichola Willis in the future will regret her decision to stop the Irex project while she had no plan B.
Lots of things could go wrong. Supply chain stoppages as the existing boats or worn-out secondhand boats struggle with maintenance and end of service life issues. Freight volume growth reversing which dampens confidence in an economic recovery. An actual shipping disaster as a result of using the boats past their recommended service life. Massive cost over-runs to buy worse boats and to construct rushed port upgrades...
I viewed the ferry cancellation, as a shot across the bow for large construction firms. Essentially saying do not keep jacking the costs, milking the government gravy train. As all projects are at risk of cancellation.
This should help with the cost of other ongoing, and future projects.
Finally, some people are waking up to the blindingly obvious and criminal mishandling of our economy. Also very clear from these quotes that Treasury are a major part of the problem - providing terrible advice to Ministers who are all too keen to hear that 'austerity is the solution'.
These are well rehearsed points on here, but I'll repeat the big mistakes (so far) for completeness...
- Big Mistake in 2020/21 was doubling up on fiscal policy (saved thousands of jobs / businesses etc) and monetary policy (which just juiced the bloody housing market and provided free income for banks). RBNZ should have taken the year off.
- Big Mistake in 2022/23 was trusting monetary policy to tame inflation - other countries used fiscal and policy tools to prevent imported price shocks driving up other prices (transport, wages, rents etc). Higher rates also clearly contributed to stickier inflation by driving up business input costs - it's madness.
- Big Mistake in 2023/24 was cutting the subsidies that were preventing inflation penetrating further - public transport, fuel excise etc. These should have been strategically extended and added to (e.g. to prevent local Govt rate increases).
The big mistake in 2024 will be cutting Govt spending. The economy is imploding and the permanent scarring and human cost will be significant.
Btw, the big Mistake in 2024/25 will be using private finance to fund infrastructure and rescue the economy.
I've mentioned that raising taxes can have a similar effect to raising the OCR.
What would have happened if at the time the RBNZ started to raise interest rates way back in October 2021 - the government also temporarily raised taxes?
Could the RBNZ have normalized interest rates rather than bludgeoning NZ Inc. with much higher and seriously contractionary rates?
Would the ensuing sugar rush of growth in NZ Inc. way back in October 2021 have been tempered - and along with it - inflation?
Would the government books have now been in a far better shape? And ready to invest much needed infrastructure while gently stimulating the economy again? (Remember, recessions follow rate inversions by a few years. A recession was on the cards and fiscal stimulus would be desirable.)
So why didn't the government do this?
Silly question really. With Kiwis knowing so little about economics they would have bitched and snarled and booted the government out next election (which they did anyway). I believe with the right explanation (educating voters - shock, horror!), the government could have sold this and have made the next election far closer with the message, "We were forced to temporarily raised taxes, so we'll be returning to normal tax levels in the next term and reviewing tax bracket creep".
If people wonder why NZ is slowly going backwards - look no further than than the reflection you see in the mirror and the people you see every day.
Some guy in a book of fairytales said, quite aptly, "forgive them, for they know not what they do". Isn't it about time we had leaders educating us rather than spouting ideological claptrap? (With the claptrap being repeated ad nauseam by their equally ignorant supporters.)
I agree and have been saying for a while that education of the average voter would lead to better representation and more critical and informed voter base. Thus the tragedy in current education statistics across NZ Inc will have a flow on effect down the line presumably. When sensationalism is the hit thing of the day, and education loses it's value in some sense given the dilution of so many having tertiary degrees now and not finding any career benefit, how do we reverse this trend?
Chris. I gather you think our current interest rates are not normal?
What do you think the chart in the link below indicates?
When the RBNZ was formed back in the 90s, monetary policy was removed from political control and placed into the hands of an independent central bank. While politicians had control, overseas lenders demanded a 'risk premium' of a few % points above US rates in lending to NZ Inc as politicians were (and still are) a thoroughly unpredictable bunch and overseas lenders had little faith that inflation would be controlled and the NZD would steadily depreciate.
It took 15+ years as the RBNZ showed its mettle and that risk premium slowly fell. Thus the 'new normal' period of rates was closer to the present than way back before 2010, 2005 or even 2000. So when you are talking 'average interest rate' it is wrong to go back too far as that former period reflects a quite different time.
I've posted this explanation before.
It's the actual interest rate that counts. As it emerges. The different rules that led to it don't count.
Many common taters on this site are desperate to return to 3% mortgages, which they regard as 'normal'. (self interest driving belief maybe)
But those rates existed only briefly. The current ones are more the norm.
We really, really, really need someone with Jfoe's economic nous as finance minister. This one is going to be an absolute shocker.
The economy is tanking people, government spending needs to be counter cyclical, not austerity in bad times. ESPECIALLY when we have headroom to do so. We are currently tipping into really bad times. You can "rah rah" the new government all you want, but if this continues, in a couple of years time when we are in a deep depression and have falling living standards, mass unemployment, high crime and huge exodus of people to Aus, you will be regretting that support.
Remember this from the people looking on from the sidelines, you know the ones not biased by idiotic populist nonsense:
Dimitris Valatsas, the chief economist at US advisory firm Aurora Macro Strategy, said he found the presentations by NZ’s top policymakers to be “bizarre”.
“New Zealand has ample fiscal space to support the economy and it seems bizarre to me that it is not being used — and even more bizarre that the Government feels there is a need to reduce spending right now,” he wrote in an email.
In a later note to clients, he suggested shorting the NZ dollar and buying Government bonds.
“Policymakers have locked themselves into procyclical monetary and fiscal policy which, while deepening the slump, should support bonds,” it said.
I share this forecast but I am not sure that we have the bandwidth to deliver enough civil engineering projects to change the game... our capacity is limited, inefficiently organised, and not particularly slick (e.g. people are constantly waiting for other stuff to get done, or for plant / materials to arrive).
falling living standards, mass unemployment, high crime and huge exodus of people to Aus
Reality check time - we have been there for a while. The new govt is just pulling everyone's beer goggle off and exposing the drunken debt bender the last govt had us on, Borrowing more money without a plan leads to bankruptcy for individuals and businesses. Our political leaders should not be deluded into thinking that a sovereign state is any different.
Our governments finances are nothing like those of a business or an individual. The government spends its currency first and then it taxes and borrows back this currency. Borrowing is a self imposed financial procedure by the government and has nothing to do with financing its spending, its purely an accounting structure.
I agree, but if you'll forgive the pedantry, things actually cost labour, energy, materials etc. We focus on 'the money' at our peril. The stuff we need to do over the coming 10 - 20 years is like a wartime mobilisation. We will succeed if we have less people building helipads on Waiheke and selling us crap we don't need in Harvey Norman, and more people building railways, houses, providing healthcare etc.
And even more so when most people simply have no real appreciation of the numbers involved.
Here's a favorite of mine to point this out:
The magnitude of difference between billion and million can be illustrated with this example of the time scale:
A million seconds is 12 days. ... A billion seconds is 31 years.
Nice - I'll steal that! Or to put it another way, a million dollars will buy you 10 skilled people full time, a billion will buy you ten thousand. So, when the infrastructure commission tells you that we need to spend an extra $10bn a year just to get infrastructure 'back on track' (sic), just think about the increase in the size of the supply chain!!
so the Govt needs to balance the operational budget and spend way more on long term infrastructure projects that have a long term benefit.
Less motels for the homeless but fund more houses
Cut super but fund more new hospitals
It can/will be a difficult transition given the position we are in
The failures of democracy are that in times like these, people have no idea what they are voting for. Even well educated and successful people. We have to ask ourselves what is needed to prevent economy failing over the next year or two, unfortunately we do not have a time machine so "Labour did it!" doesn't work.
We have the wrong government for a time like this, fooling people into thinking selling of assets will help us, cutting beneficiaries will help us (except for Luxons bene), cutting jobs will help us, cutting infrastructure spend and front line funding will help us, cutting school lunches will help us, cutting smoking ban will help us, riling up gangs will help us, kicking people out of homes will help us.
What on earth did we vote for? So consumed by paper equity, prepared to lose it all just to find out.
I'm always astounded by the fact that any challenge to the current government results in "but Labour did...!!!", which I thought I'd covered off by reminding everyone that we can't go back in time. This whole article is about pro-cyclical policy, ie spending too much at the peak, and conserving too much during the downturn. If the argument is that Labour spent too much during covid when times were "good", then surely the same logic applies to this government spending too little when times are most certainly turning bad. So long as we consider these two to be our only options, we'll be stuck in the same patterns. In fact I'd put a beer wager on Nicola backstepping on the surplus target and being forced to revise spending before the end of 2024.
What is the government of today proposing to ensure we have a stable economy and society moving forward?
Again;
- selling of assets
- cutting beneficiaries (but not mine pls pls pls)
- cutting jobs
- cutting infrastructure spend and front line funding
- cutting school lunches? (DS on the hunt)
- cutting smoking ban
- riling up gangs
- kicking people out of homes
The only reason this government does not wish to spend is because they know they would need to implement a comprehensive tax policy in order to balance funding the infrastructure and service deficits we face (this is the part that helps prevent currency collapse, not austerity, which is only ensuring economic and social collapse which is already tipping over). This would mean we'd actually have to work and produce things, rather than rely on financialised tax free capital gains and bank profits to run the economy.
Also - Nicola can't math. Unsure if you followed the election campaign, but pretty eye opening. Also can't read, never read the PREFU. Wouldn't be surprised if Nicola couldn't count how many budgets she had going, or maybe she's too busy trying to find out how to cover that $20b budget hole that's been quietly swept away as part of coalition agreements. This is our finance minister. Back to back bad.
New Zealand has managed to do the opposite. The Labour-led Government threw huge amounts of money into the economy to offset the covid downturn.
And, it worked all too well. Economic activity came roaring back to life but Labour could not bring itself to switch off the support even as the ‘check engine’ light started flashing.
Dan, you do history and the financial education of our population no favors by omitting the roll of the RBNZ in this period. Could you please correct that section so it doesn't read like a petty political swipe at the previous government. It is impossible to write of that period without giving due weight to the actions of the RBNZ - especially so as the RBNZ themselves acknowledge they made some serious mistakes. Thanks.
I'm quite surprised you missed it. Pretty sure interest.co.nz wrote about it.
https://www.rbnz.govt.nz/hub/publications/monetary-policy-statement/raf…
There's no obvious acknowlegement in that self serving PR spin drivel about "RBNZ made some serious mistakes". More like: "...regrets, I've had a few...but then again, too few to mention".
eg.
"Lessons learned:
The formulation and implementation of monetary policy has been consistent with its objectives. Over the past 5 years, monetary policy has been set to ensure that forecasts of inflation return to their target and maximum sustainable employment (MSE) is supported. However, while Reserve Bank forecasts have been relatively good compared to other forecasters, they misjudged some aspects of the New Zealand economy. For example, the fall in neutral interest rates prior to the pandemic and the effectiveness of fiscal policy during the pandemic were likely underestimated.
Monetary policy over the review period has had clear regard for the efficiency and soundness of the financial system. It has been set so as to avoid unnecessary instability in output, interest rates and the exchange rate. The Reserve Bank and the Committee have also comprehensively assessed the effect of monetary policy decisions on house price sustainability.
Faced with pervasive uncertainty, the Committee engaged in agile and nimble decision making in response to the pandemic. In early 2020, 3 monetary policy decisions were made over a four-week period, in response to a rapidly evolving situation. Likewise, Reserve Bank staff worked through operational matters in a systematic and considered way, leading to a well-controlled operational risk environment and well-implemented monetary policy decisions. "
I’m sure I’ve written about this elsewhere.
Consensus says there were three main factors, in order of importance:
1) Pandemic supply shock
2) Monetary policy
3) Fiscal policy
Here’s how McLiesh described it:
“…our assessment is that fiscal policy has contributed to interest rates being higher
than otherwise. It is not the main driver, but it is a factor among many others”.
Yes, McLiesh assumes that...
Elevated Govt spending → Excess demand → Prices higher for longer...
Which then required RBNZ to hold interest rates higher for longer.
What this misses (tellingly) is that Treasury never considered how Govt spending could be used to tame inflation - how targeted subsidies / policies could stop price contagion in the economy. Denmark, Spain, France, Switzerland, USA etc all demonstrated that this was the smarter way out.
Current US government spending is no panacea.
Thanks for the reply, Dan.
So you agree that omitting Monetary Policy when talking about the economy during / post the pandemic does not present the full picture?
This matters a lot to me and many others as NZ Inc. has a real problem blaming it's government for everything, especially when they are ignorant of of the full facts, or indeed how our economy is structured.
You could have written the following:
New Zealand has managed to do the opposite. The Government and the RBNZ threw huge amounts of money into the economy to offset the covid downturn.
And, it worked all too well. Economic activity came roaring back to life but both the RBNZ and the Government were slow to switch off the support even as the ‘check engine’ light started flashing, i.e. pandemic supply shocks caused shortages and, with loose fiscal and monetary policy, inflation ensued.
"Some economists might argue the Government should hold spending steady, even if it means adding to the national debt, and wait for the economy to catch up".
If the government is spending domestically then it cannot add to the national debt as the money remains within NZ and becomes our savings held in the governments currency. As sectoral balances shows a government sector deficit must create an equal private sector surplus. Government debt is simply our net savings.
FFS - that crock AGAIN!
Jfoe gets it, time you did. Resource-availability (which really means energy availability) is what underpins debt-repayment. It doesn't matter if you hold it or I hold it or the government holds it - IT IS A CLAIM ON FUTURE ENERGY AND RESOURCES.
And at this late stage in the depletion game, I do not apologize for shouting.
If they ain't there, or are in increased contention (and are thus less there) then the debt is not underwritten (at currently-understood cashed-in-for-resources rates). The problem is a physically-depleting planet, said depletion happening exponentially... The forward bets include all shares, bitcoin, kiwisaver, pension-expectations.....
If the purpose of higher interest rates is to fight inflation by taking money out of people's purchasing power, they should look at better ways of doing this.
- temporarily increase kiwisaver contributions
- encourage people to pay more off their mortgages
- temporarily increase bond interest rates
Of course these would all be seen as authoritarian, better to whack up interest rates so people don't feel they are been targeted.
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