Kiwi News and Views

Is the economy in another long stagnation? If so, why?

This is about the time that the Treasury will be locking up its economic forecasts to be published in the 2024 Budget Economic and Fiscal Update (BEFU) on budget day, 30 May. I am not privy to what they will be (I will report on them in due course) but the Treasury are competent economists persuaded by the evidence, so other economists should be able to make reasonable guesses at what is bothering them

Probably the economy is in a state of stagnation. I come to this conclusion on a slightly different basis from the news headlines – gone the day after – which we are all fed. First, I use per capita GDP as a measure rather than aggregate GDP. I got into that habit when I was writing an economic history of New Zealand because population growth in some periods dominated market economic activity (I use GDP well aware of its limitations both in content and sustainability; that is what the news headlines use.) Second, I do not use mechanical definitions of stagnation and recession because I am too aware of the measurement noise in the estimates (which are a proportionally bigger problem in a small economy like New Zealand than in a huge economy like the US which the news headlines tend to imitate). Those who lack economic and statistical judgement should stick with mechanical definitions.

The statistical record is that GDP per capita grew at about 1.6 percent p.a. between end-2010 and end-2019. Then the economy went into turbulence during the Covid nationwide lockdown of the first half of 2020. Since then, it has hardly grown at all. Sure, there have been ups and downs but eyeballing the chart, per capita GDP looks flat. End-quarter-2023 GDP per capita, which is that latest figure we have, is only fractionally above end-2019. The growth rate since then has been about a tenth of the pre-Covid growth rate at 0.16 percent.

Treasury’s 2023 Half Yearly Economic and Fiscal Update (HYEFU), locked up in November 2023, forecast that per capita GDP would fall in the three years to June 2025. The forecast seemed to imply that the economy will not to return to the end-2019 level until early 2026. As I say, I have not seen the Treasury’s  current forecasts but most of the economic news since November has been pessimistic, so it may be the Treasury will now be expecting the end-2026 level to be much the same as seven years earlier.

In the past I have treated such a seven-year stagnation as significant. It amounts to double the length of the traditional standard business cycle of the New Zealand economy, although it is shorter than the past major stagnations:

            – the Long Depression (1878 to about 1896 –18 years);

            – the Interwar Recession including the Great Depression (1908 to 1935 – 27 years);

            – the Post-War Stagnation (1944 to 1953 – 9 years);

            – the Wool Price Crash (1966 to 1978 – 12 years);

            – the Rogernomics Recession (1985 and 1995 –10 years).

(You can read more about them in the appendix of my Not in Narrow Seas: The Economic History of Aotearoa New Zealand.)

What is causing this stagnation? I discount political explanations as superficial. It looks as though this stagnation is going to straddle both the stewardship of Labour’s Grant Robertson and of National’s Nicola Willis. The negligible growth rate made it politically and fiscally difficult for Labour and is making it similarly difficult for National. Were the economy on its pre-2019 trend, the government’s revenue would be up an additional 6 percent. Even if the Coalition Government’s policies – such as the infrastructure spend – boost the long-term growth rate, their significant impact will be beyond the time horizon with which this column is concerned.

A possible explanation is Reserve Bank actions. In November 2022 a select committee asked the RBNZ Governor whether the central bank was deliberately engineering a recession to combat inflation. He answered ‘I think that is correct. We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.’

The difficulty with that explanation is that the economy seems to have already been in stagnation before the RBNZ took its action, Nor is one sure that Governor Orr expected his induced recession to last as long as even three years. Still, it is reasonable to suggest that the RBNZ measures to stifle inflation have contributed to prolonging the stagnation. (Or, as it might argue, that it has been the reluctance of players in the economy to get their expectations down.)

Undoubtedly, the beginning of the stagnation is to do with the onset of the Covid pandemic. Unfortunately, the measurement system which underpins our National Accounts was not designed to deal with this sort of shock. But even if we start the analysis at end-2020, when the initial shock was over, we still seem to be facing around six years of stagnation.

The international post-Covid economy has not been doing well. (And probably worse than the 2023 HYEFU assumed, which is one of the reasons the forecasts in the 2024 BEFU may be wound back.) It has also been a major source of the inflationary pressures that the RBNZ has been trying to resist. Add to this heady brew the economic impacts of the invasions of Ukraine and Gaza (although wars usually add to economic activity as well as to inflationary pressures).

We also need to be mindful of the possibility of ‘secular stagnation’ among affluent countries – a long-term slowing down of the growth rate of their material production. Perhaps New Zealand is joining them. It will take a number of decades to be certain whether this is, or is not, happening.

The fact is that the New Zealand economy has now been stagnating longer than one standard business cycle. The expectation is that it will continue to do so. Before proposing policies to boost the sustainable growth rate, there is a need to explain systematically why the New Zealand economy appears to be stagnating. Treasury’s 2024 BEFU should give us further insights.

It is all very well cutting the backrooms of public agencies but it may compromise the frontlines.

One of the frustrations of the Productivity Commission’s 2017 review of universities is that while it observed that their non-academic staff were increasing faster than their academic staff, it did not bother to analyse the trend.

In today’s jargon it found that staffing in backrooms was increasing faster than in the frontline. This need not be a bad thing. For instance, the police force’s backroom includes ‘unsworn’ officers who carry out clerical tasks, relieving the sworn officers to spend more time on the frontline. On the other hand, academics have complained that their administrations have asked them to fill in forms compiled by people who had little idea what academics actually do; some ignored the forms – their institutions still seem to be running much as ever. For another example – one hears more grumbles than good reports, but that is the way of anecdotes – doctors were outraged to learn of an ethics unit in a DHB which seemed unaware that medical professions have been struggling with ethical dilemmas since before Hippocrates and did not consult them.

Sadly, the Productivity Commission flubbed the opportunity to carry out a detailed case study of the relationship between the frontline and the backroom despite it apparently being central to university productivity. Nor have I been able to find any other useful study. We rely on the treacheries of anecdotes.

The issue has become most pertinent recently with the government instructing its agencies to cut spending by 6.5 percent and more without compromising their frontlines.

Some of the cuts were easy. The Department of Internal Affairs is cutting most of the 400 plus staff who were working on the Three Waters program which the Government has abandoned. Cutting a service is a simple way of cutting staff (although this may be cost shifting and the jobs will reappear in local authorities funded by ratepayers). However that does not explain the rationale for most of the cuts.

Apparently, the Government thinks that a lot of backrooms jobs are not productive and can be dispensed with at little cost to the provision of public services. Where it got the notion from is unclear. It might be that they think they are mainly bullshit jobs although that problem is more bullshit work – only part of the total activity. (It occurs in the private sector.) That other activity may be critical is the effectiveness of those on the frontline.

The government agencies seem to have concurred with the Government view by cutting more than 3000 jobs. If those jobs can be dispensed with, does it mean that the agencies’ Chief Executives were running some highly inefficient operations? Were they all that inept? How come we appoint such amateurish senior managers?

Of course. not all were, but the effective Chief Executives who were already running lean backrooms were given similar targets to the others. That sounds neither efficient nor fair. (One has an uneasy feeling that those Chief Executives who have made the biggest cuts will be promoted, rather than demoted for running over-staffed administrations.)

The quantity target for the 6.5 percent cuts (plus a further 2 percent directed by the previous Labour Government, while some agencies had a further 1 percent added) seems to have come from the need to fund the Government’s promised income tax reductions. Presumably, this reflects its judgment that the private sector is carrying too much of the burden of the struggling economy; it is the view on which they got elected (although whether electors really understand their policies is moot). The Government may be right, although one would prefer that they were getting the savings from cutting programs and services rather nebulous backroom reductions.

But now the Government is saying it is doing the cuts in order to increase the number of workers on the front line. How that connects to income tax cuts is a bit puzzling – we await the 30 May budget to find out.

The claim one can easily shift resources from the backroom needs to be treated with caution. It is treating workers as fungible – easily interchangeable – like financial instruments. They are usually not. Obviously, some of the teachers working in the Ministry of Education can go back onto the front line. But what about those who have been working in the DIA’s Three Waters program? Give each layoff a shovel and tell them to fix a sewer?

I do not have answers to such questions. I wonder if they even occurred to the Opposition backroomer who invented the policy. That boffin is probably now an adviser in a minister’s office still as dependent upon anecdotes but beginning to face the realities which the Opposition are privileged to avoid. Ministers may be getting poor servicing, while the public may soon be suffering from poorer quality public services and cost-shifting onto them. (It might help if public servants drew more attention to the deteriorating services the public are getting and less to their own suffering – real enough though it is.)

Underlying this column is the concern that our public service is not well managed and its performance will further suffer as a consequence of these cuts. I am not making a party-specific criticism here. It is long since we had a minister of public services who seemed competent and genuinely interested in their quality. (And we have had some dud chief executives too.)

In fact, the quality of our public service is remarkable given the way it has been treated. But there is a general feeling that the quality is deteriorating, slowed only by the inertia inherent in the system. (Which may surprise, since we usually grumble about public sector inertia.)

What is needed is a thorough review. I do not mean a Royal Commission, but some solid research which focusses on nuts and bolts issues – like how public sector backrooms actually work. Without such a better understanding, cutting staff is compromising the effectiveness of the public service to the cost of the public and the politicians they serve.

One Could Reduce Child Poverty At No Fiscal Cost

Following the Richardson/Shipley 1990 ‘redesign of the welfare state’ – which eliminated the universal Family Benefit and doubled the rate of child poverty – various income supplements for families have been added, the best known being ‘Working for Families’, introduced in 2005. The result of the various ad hoc incremental adjustments with confused objectives is a difficult-to-understand and poorly targeted system of family assistance.

As you might expect from such a Heath-Robinson arrangement, the outcome is inefficient in that it is both an expensive means of reducing family poverty and not very effective at reducing the worst child poverty. The clumsiness is well recognised but every attempt to get a better system of supporting children has failed because the approach has been incremental rather than a fundamental redesign – more strings to the rackety structure.

A simpler delivery of the same income support would markedly reduce child poverty without costing the state anything more – so inefficient are the current arrangements. Let’s call it a ‘Universal Family Benefit’ ((UFB). If differs from the one introduced in 1946, by its contribution reducing as the family earns other income. The bleed-out rate on this extra income is 39 percent (the top income tax rate).

To evaluate the proposal, I’ve used the Treasury’s microsimulation model of the New Zealand personal tax and transfer system TAWA (Tax and Welfare Analysis), which they use for assessing tax and benefit changes. (The Treasury is not responsible for these results, but thankyou for their help.)

The system would work by families choosing to go onto a different tax code – let’s call it the Family Tax Code (FTC) – which involved their paying 39 percent on all their market income. Additionally, the family would receive for each child an untaxed benefit of $255p.w. (the precise calculations apply for the 2021/2 year). They would not get all the other family tax credits and benefits would be stripped out (except for the adult part of the benefit which goes to solo parents). (Some high-income families would be worse off if they went onto the FTC; they would choose to remain on the existing tax code instead.)

The level of the child benefit was chosen so that the package had net zero fiscal cost (overall cost to the government). Yet despite the fiscal balance, the proposed package would result in 64,000 fewer children being below the poverty line (using the ‘moving-line BHC50’ measure; the broad conclusion of a marked reduction in child poverty will apply for any sensible poverty line). TAWA thinks there are about 115,000 children below that poverty line, so the UFB package would reduce the numbers in poverty by over a half – the ambition of the Child Poverty Reduction Act – without any extra government spending. One might argue that the current system of income support for children is less than 50% efficient.

There are modifications which would reduce child poverty (and increase the efficiency) even further. For instance, there is a case for having the family benefit higher for the first child. Best Start, which provides additional support for recently born children, should be kept. The simulation also left the existing housing and early child education support in place; both can be rationalised, with further gains.

Since the UFB is fiscally balanced, if some children (and their parents) are better off, it follows that some others (and their parents) are worse off. In fact, the scheme pushes 6,000 children below the poverty line as well as lifting 70,000 above it (hence the net 64,000 children).

The UFB also reduces the incomes of many families, although they would still be above the poverty line. That poor targeting is where the inefficiency of the current scheme comes from. (Typically, these are smaller families; the current regime underfunds the poor in large families.) This is an example of Rabin’s Law – named after an American economist, Matthew Rabin – that all policy change makes somebody worse off.

The big challenge of introducing a new redistributive scheme is how to get from the current inefficient scheme to a more efficient one without causing too much pain to those who are made worse off. That is the trick of the different tax code. A family does not have to join the scheme. On the other hand the rule would be that no family could join the existing Heath-Robinson scheme. Moreover, the old scheme rates would not be increased, so that it would become less costly and eventually phase out over time over time as families dropped off. (So there would be transition costs, which would temporarily unbalance the budget. Most incremental redesigns assume that their new scheme would be more costly.)

What is the catch (once we have got through the transition phase)? First, it involves combining both parents’ income, but that happens already. But it does not involve any household paying more tax, since parents could leave the tax code and miss out on the accompanying family benefit.

The big issue is the 39 percent uniform income tax rate. Many people will judge that too high. A high rate is necessary in order to finance the scheme. The tax rate could be reduced, but that would mean a lower UFB and more children left in poverty (while well-off families would do better).

The UFB is an extension of minimum income support. Those over 65 already have it in New Zealand Superannuation. However, universal minimum income schemes require high tax rates.

It is possible that some families faced with the high rate will choose to reduce the hours they work. In effect, income inadequacy is forcing them to work longer hours than they judge prudent. Many will be able to spend more time with their children, which is no bad thing. The most likely reduction will be parents choosing to finish work early so they can be home in the afternoon or during school holidays.

In any case, there are families already facing marginal income taxes far in excess of 39 percent. It is just that the muddle of current rules makes it hard to identify when that happens; the UFB is more transparent and less confusing (it may even require fewer bureaucrats to run it).

The reason that the scheme does not eliminate all child poverty is because it does not provide a minimum income for parents – that would require much higher income tax rates. But it will markedly reduce income stress in most poor families below the poverty line.

So it is possible to reduce child poverty substantially with simpler, more transparent and better targeted income support at no extra cost to the taxpayer in the long run.

As a final point, observe that this is an example of how difficult it is to replace a badly designed policy by a better one – a consequence of Rabin’s law. A poor-quality policy makes some people inappropriately better off. A better policy will make them worse off and they will resist the change. There are many other examples of badly designed policies; sometimes I think New Zealand specialises in them.

There is a constant theme from the economic commentariat that New Zealand needs to lift its economic growth rate, coupled with policies which they are certain will attain that objective. Their prescriptions are usually characterised by two features. First, they tend to be in their advocate’s self-interest. Second, they are unbacked by any systematic empirical evidence using, instead selective anecdote. Well, yes; there is always an example to confirm one’s prejudice. But rarely will it stand up in a court of science. (The conversation is not helped by those who cannot discriminate between productivity growth is slowing down and productivity is falling.)

My research on economic growth has been driven by curiosity rather than seeking policy conclusions. It goes back to almost the beginning of modern growth economics in 1960 when we began having the data and the theories it generated.

I may have done more research on the topic than any other New Zealand economist. For instance, I can explain why in some periods the economy has grown more slowly than other affluent economies. The explanations are prosaic and do not depend on an ideology. The salutary conclusion is that there was not much we could have done to change the underlying growth rate. (That is not true for other measures; for instance, sometimes we could have avoided high rates of inflation – but with different costs from those that inflation imposed.)

That does not mean that we can do nothing about the economic growth rate. It needs actions to maintain it; some of those actions are in our powers. I remember a 1965 seminar – it was discussing then fashionable planning – at which someone said the concern was unblocking bottlenecks. A lifetime of research has demonstrated the wisdom of this observation. The best explanation I can give for economic growth (aside from moving resources from the non-market to the market) is the introduction of new technologies – blueprints on how to do things. They often require changes to policy.

For instance, Telecom could not work out how to create a broadband network. The government had to intervene to enable the rollout, breaking the bottleneck with a new telecommunications configuration based on Chorus. The strange thing is that while a comprehensive broadband network is a good thing for the economy and society (and has had dramatic impacts on our lives), I have seen no evidence that it has increased the economic growth rate. Perhaps if the rollout had not happened, the growth rate would have stalled, although I am not sure how to verify the proposition scientifically.

One of the strangest results from the research is that within measurement error the underlying long-run economic growth rate has been broadly constant since the 1860s – as far back as we can go. I am stuck with an explanation that the impact of those technological blueprints over the last two centuries has been broadly uniform. (I am not entirely comfortable with the explanation; any empirically based alternative explanations would be welcome.)

Bottleneck-busting best explains the New Zealand Productivity Commission (NZPC). The rhetoric was that its purpose was to increase the economic growth rate. There is not a skerrick of evidence that it has.

But the NZPC may not have been a failure. Rather, it has been reviewing growth bottlenecks. There are diverging views about how successful it has been. Some are ideological. Under the National Government the NZPC had a bias towards a neoliberal account of how the economy worked. Their friends commended their work, although in some cases the bias meant the NZPC did not chase up what I thought would have been fruitful lines of enquiry. When the Labour Government eventually appointed Commissioners who were more attuned to it’s view, the neoliberals began to vigorously criticise the NZPC. That’s politics.

Much of the work of both phases had little impact on the public debate. (However, policy analysts in the public sector have told me they found particular reports invaluable.) I particularly draw attention to Business by Numbers, published in February 2024, which usefully brings together a lot of information from various Business Operation Surveys. The report concludes it has only scratched the surface of what is available; there is a lot more work to be done before we can fully exploit the potential that the surveys offer.

Alas, the work won’t be done by the NZPC (or, probably, anyone else). The incoming Government has closed it down. When the NZPC was established, the National Minister of Finance, Bill English, said the intention was that it would be non-political and survive change of governments. It was in that spirit that the following Labour Minister of Finance, Grant Robertson, left the NZPC largely untouched until new appointments were necessary; so that for his first term the NZPC continued to operate as it had, with its neoliberal bias.

Despite the NZPC being a 2010 ACT initiative, it was the ACT party which abruptly abolished it in February 2024 in an exercise of taking no prisoners. (One is reminded of neoliberals in the 1987-1993 period; if it continues, the current Government may be reminded in the 2026 election of the collapse of support experienced by its predecessors.)

The funds saved from the abolition of the NZPC are being diverted to the newly established Ministry of Regulation. (It will be three times as large as the NZPC – here is one area the government is not cutting back.) Because it is a ministry – its minister is ACT party leader David Seymour – it will have less independence than the NZPC.

There is a view that what is stalling economic growth is over-regulation; abolish it and the economy will boom. It is hard to find empirical evidence to support the view. The last big attack on regulation was in the 1986-1993 period. It is difficult to show it enhanced the growth rate. Once the economy got through the stagnation from macroeconomic mismanagement, it returned to chugging along at the historical growth rate.

Because I wanted to believe that market liberalisation would benefit the economy, I put a lot of research into assessing the hypothesis. I concluded that the liberalisation seems to have led to a better quality of output, more variety and more resilience, none of which are measured well in conventional economic growth statistics. It was also more beneficial to the rich than the poor. But, blow me down, I could not find any acceleration of the underlying growth rate.

There is a counter-example. New Zealand’s fastest economic growth in the last century was in the late 1930s and the early 1940s under the First Labour Government, even when we have allowed for the recovery from the Great Depression. It was also a period of a substantially increasing state regulation of the market. I do not think the additional interventions explain the growth boom, but the episode suggests they did not retard it either.

There is a case for more pragmatic attention to regulate better. Two examples I have looked at illustrate the need. The Leaky Buildings Disaster was a case of under-regulation which cost the country millions of dollars to replace badly built homes and other buildings, while stressing many homeowners. The 2016 Building (Earthquake-prone Buildings) Amendment Bill is a case of over-regulation which is costing the country millions of dollars to unnecessarily modify homes and other buildings, while also stressing many homeowners.

Business by Numbers devotes a chapter to business views on regulation. It found grumbling rather than griping. (The largest concern is workplace safety rules.)

There is certainly a case for better regulation of markets. It would be great if the Ministry of Regulation meets the challenge, although it won’t unless it approaches each case pragmatically. I doubt that it will have much impact on the economic growth rate but, done well, it will improve the quality of life of New Zealanders.

PS. I am puzzled why the Minister of Regulation is not one of the ministers to make the final determination on Fast Track Approval. The current proposal involves the Ministers for Infrastructure, for Regional Development and for Transport (sometimes the Minister for Conservation will be involved). It almost suggests that the government is running two separate economic development policies.

Do we treat the government finances with the common sense that household’s manage theirs?

It is a commonly held view that we should treat the government as if it is a prudent household. We don’t when it comes to its debt. Currently the government says it wants to constrain its net debt to between 20 and 40 percent of annual GDP; that is, between about 67 and 133 percent of its annual revenue. But households borrow up to 450 percent of their annual before-tax income.

Households borrow at that rate to purchase houses. They look at the whole of their balance sheet including their assets as well as their liabilities. When did you see mention of government assets in a discussion on our debt policy? For the record, they sum to about 400 percent of government annual revenue although not all generate income or save spending. Net worth (which deducts all the liabilities) is about 133 percent of annual revenue.

Focussing solely on debt without looking at the balance sheet as a whole distorts public investment. Some examples:

Suppose a significant private business collapsed (as did Air New Zealand and Kiwi Rail) and the best rescue involved the government taking over the enterprise. Even if there was no equity to be purchased, the government may have to take over the failed business’s debt. ‘Sorry, minister, you can’t rescue the business because that would exceed the debt ceiling.’

Suppose we wanted to tackle the problems of our fresh-, storm- and waste-water which will require borrowing up to $20b in the next 30-odd years. The most cost-effective structure would be to leave the responsibilities for water with (large enough) regional authorities which borrowed their funds from a central government agency which borrowed the $20b (or whatever) offshore. ‘Sorry, Minister, you can’t do that because the central agency would appear on the government balance sheet which would then exceed its debt ceiling. So we will have to design a more inefficient and costly solution.’

‘Sorry, Minister, you can’t get around the debt ceiling constraint by using a public-private-partnership in which the private sector does the borrowing but the government services the debt.’ Other countries use this ghost public debt so they can, in effect, borrow more than their debt ceiling allows. But it is still a government liability and, because we use more rigorous accounting standards, it appears as such as in the Government’s Financial Statements and is included in overall debt. (Currently it amounts to $3.7b. It is backed by two state highways, three corrections facilities, and some education assets.)

On the other hand ‘Sorry, Minister, your focus on a debt target ignores any assets which may match it means that we are failing to provide sufficient infrastructure and maintenance to offset the depreciation of assets. Not just central government. Local government too. That is one reason our fresh-, storm- and waste-water systems are increasingly failing us.’

It’s Gilling’s law isn’t it? By prioritising the debt target we shape the game to ignore assets.

There are complications. A household’s borrowing is not simply constrained by its belief in its ability to service the debt. It is also constrained by the willingness of lenders to advance the funds. They are particularly concerned that they can recover their advances if things go belly up. (That is why they won’t advance you unlimited amounts to speculate on crypto-currencies, even if you think it is a sure thing.)

International lenders have got tangled up in countries which cannot meet their debt obligations. So they are cautious. Even so, New Zealand’s relative public debt level is well below the debt levels of many countries which are considered prudent borrowers.

There is a case we should be a little below that level. All prudent households (which are not facing too much hardship) hold a reserve they can use for an unexpected shock. It may be cash or an investment which can be readily liquidated; it may be an additional capacity to borrow. New Zealand has some of the former (the Reserve Bank has foreign exchange reserves) but low public debt makes it easier to borrow offshore in an emergency. New Zealand is probably more vulnerable than average to some shocks – earthquakes, volcanoes and tsunamis and the volatility of its terms of trade (but not militarily shocks so much) – so we need to maintain a lower debt level than what is normally accepted. (Another factor is the private banking debt, which may be pushed back onto the Reserve Bank in a financial crisis, but we have greatly reduced that exposure since 2008.) A margin for additional prudence does not explain all the difference in our lower debt target.

Observe too, that the above analysis has been in terms of debt levels offset by assets. It did not argue we can borrow for consumption. (It accepts a government may borrow or raid the reserves for short-term emergencies; any net asset reduction should be reversed reasonably quickly.)

Let me passionately state a moral perspective. Public borrowing is a cost to future generations. I do not think one generation should borrow unless it can justify its debt servicing to those yet-to-be-born, even if deciding what they will value when they are adults may be difficult. The decision is easy for investments which make a return; it is much harder where the borrowing funds activities which do not.

There are items which do not give a financial return but can be justified; conservation and heritage projects for instance. Future generations are likely to bless us if Aotearoa New Zealand is predator-free in 2050 (although the amount of borrowing the program generates is trivial).

Conversely, education is an investment but (largely) an investment in the individual who may migrate taking their education with them. I am committed to providing every New Zealander with a decent education (and healthcare) but it should be funded from current revenue.

The logic of this analysis is critical of the current government fiscal strategy, which amounts to borrowing for current consumption via income tax reductions. We are not in an emergency (and the government is not proposing to reverse the tax cuts when it gets through the current phase). We should support borrowing for projects which future generations would value, such as in conservation and infrastructure.

Once we ran the government as if it were a prudent household. Initially Keynesian management ran a surplus on current public spending which was invested in businesses and infrastructure; further funding was supplemented by borrowing. Today we are not as prudent. Borrowing to fund consumption is likely to be unfair, inefficient and detrimental to future generations.

If we are to have a target, perhaps something like the following: over a medium term, public current spending including transfers should not exceed public revenue. In the medium term, public borrowing should only be for public investment.

Budget tensions are becoming evident within the Coalition Government.

Winston Peters made numerous political points in his speech to the NZF annual conference. But the attack on his own government’s fiscal policies raised issues of substance.

     ‘Today in the Sunday Star Times, journalist and former advisor to the Labour Government, Vernon Small, refers to the ‘present government facing a fiscal hole’ of $5.6 billion. He’s right of course, but he’s wrong when he said that last year politicians were warned of that. Only one political party in the 2023 [election] campaigned to alert New Zealanders as to how bad things were. New Zealand First pointed out where optimistic predictions of others were false – such as the ‘House Buyers Tax’, and taxing on overseas online gambling.’

Small’s column has an interest even had Peters not referred to it. It was sufficiently confident to suggest he was relying upon a reasonably informed source. That does not mean Small’s estimate of the fiscal hole was correct. There has been a lower estimate of $3.6b, in contrast to a promised saving from expenditure reductions of $1.5b. I don’t think includes the promised tax cuts. The numbers are all over the place and probably do not add up. Small and Peters gloom was broadly confirmed by Minister of Finance Nicola Willis in her recent Budget Policy Statement.

Whatever, Peters seemed to be attacking the fiscal stance of his National and Act colleagues or perhaps even disclosing an internal Cabinet debate. What was the political purpose? Peters must have realised it would both embarrass his coalition partners and add to the instability of the coalition.

I do not know how advanced the internal Cabinet debate about the 31 May Budget is. However, it is usual at this stage in the process that the external task is to manage public perceptions – as Willis has been doing. I cannot recall an earlier New Zealand budget where the usual tensions have appeared so explicitly in public so soon.

There are two views of Peters which might help provide an answer.

One might be called ‘Winston First’, which was the title of a 1995 book, by Martin Hames commissioned by those with a neoliberal disposition. It portrayed Peters as an unprincipled self-seeking politician who cynically sought popular support for his personal ends. This was to explain why Peters left the National Cabinet in 1992, when it was in its full neoliberal glory. (Peters is not the only politician to be so explained by ideologists who cannot understand why anyone would disagree with them.) That he is a politician without principles seeking only personal gain is a widely held view by those on his left as well as on his right. Peters has sometimes reinforced the perception with populist stances he has taken.

Why would Winston First have publicised the fiscal critique? Its logic might be that it would precipitate events which would result in him becoming full prime minister.

That seems unlikely. Suppose the Coalition Government collapsed. There would be an election. Perhaps NZF’s share of the votes might rise, but a stronger possibility is that it would get blamed for any collapse. That is hardly a path to WP4PM, especially as Peters appears to be currently cutting off the possibility of an NZF coalition with the parties on the political left.

(We can rule out the relevance of a scenario in which the left wins an early election, fails again, and NZF is triumphant in 2028. Peters would be 83, older than Biden is today.)

The alternative to Winston First portrait might be called WPPPP: Winston Peters – principled, populist, politician. Perhaps ‘politician’ is redundant. It is there to remind us that he is continually seeking a coalition of the voting public to support him and that sometimes that coalition involves some strange bedfellows.

‘Populist’ is there because Peters in style and belief naturally connects with a broader population with its scepticism of the political elites. In turn, the elites do not connect with him. He does not fit their models of a Māori boy from a poor rural background who should be a deferential conservative or angry lefty. Peters is an angry conservative.

That is where ‘principle’ comes in. Peters has some deep principles which are poorly recognised – those of a rural working-class New Zealand Tory. This is not a well discussed political group (nor its urban equivalent) even though it is more common than is recognised; a chunk of the working class regularly votes on the right.

It has a view that New Zealand is a land of opportunity. While it may be sympathetic to those in difficulty, it is coupled with a suspicion of state welfare because it may sap initiative. The view is critical of the Brahmins on the left, who are considered out of touch with the common people (and often excessively woke), and of Big Commerce on the right. It is strongly New Zealand nationalist.

This philosophy was expressed by Peters in his 1979 maiden speech with its belief in ‘free enterprise’ and encouraging hard work, and his description of coming from a poor family which thrived by working together.

Peters loathes neo-liberals. It is not just a question of ACT taking up potential support of the non-left who dislike National from NZF. In 1993 Peters left the National party – he had been a member for twenty years – because of its neoliberal policies. Peters said in his 2017 speech anointing Labour as the main party of the next government:

     ‘The truth is that after 32 years of the neoliberal experiment the character and the quality of our country has changed dramatically, and much of it for the worse. … Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human – face.’

So he sees NZF restraining ACT and the neoliberals in National the the Coalition Government. (Despite ACT having more of the voter numbers than NZF, it has less power because a party on a political extreme has fewer options. Additionally, Peters is politically more experienced and probably politically smarter than the leaders of National or ACT. Counterbalancing is not a vain objective.)

It is not an exaggeration to see the fiscal debate that is going on within today’s Cabinet involves tensions between the extreme-right and centre-right. WPPPP’s conference speech was bringing them into the open in order to weaken the neoliberals.

A final point: Peters is indicating that he had an unhappy time in the Labour between 2017 and 2020 and he appears to be in difficulties with the current Coalition Government. The one other time he has been inside a coalition Cabinet was between 1996 and 1998. (He was outside Cabinet in the 2005-2008 Clark-Cullen Government.) In 1998 Peters fell out with Jenny Shipley, who is a neoliberal. Earlier he had got on well with Jim Bolger, who is also a rural working-class Tory (his family farm was not affluent) and who has also expressed doubts about neoliberalism.

Is she hinting that the Coalition Government will have to back down on key promises it made in Opposition?

The Minister of Finance, Nicola Willis, is telling an evolving story about her fiscal challenges. In Opposition she was confident that she could deliver her promised income tax cuts. Appointed minister, she reported the (Treasury) ‘books’ were in a worse state than she expected, although this seems to be more from her advisers not reading the Treasury’s Pre-election Forecast and Update carefully enough. It’s a good trope because it blames the outgoing government, but it’s hardly the analytic foundation to plan the 31 May budget.

More recently, she has been arguing that the economic outlook is tougher. The Treasury September 2023 PREFU, and just about everyone else, had forecast a stronger economy for 2024 than now looks likely.

We won’t have the detailed Treasury macroeconomic forecast until the end of May, but the Reserve Bank’s Monetary Policy Statement has one although, alas, not as detailed nor as structural as Treasury’s so that it is harder to analyse.

Even so, we can get some insight into the deterioration by comparing the RBNZ February 2024 forecast with the November 2023 one. It would appear that it is now expecting the economy to track about 1 percent lower than was expected three months earlier. The commentariat has just announced the economy was in recession in the last 6 months of 2023; a more detailed analysis suggests the economy has been stagnating since the middle of 2022. The forecasts do not expect the economy to really pick up before the end of this year. That means per capita output has been falling and will continue to fall through the year. Next year might be better – it might not.

The fall appears to be from lower than expected private consumption and possibly in exports – although the RBNZ now expects export prices to be better – and public expenditure (neither of which it reports). Business investment has hardly been changed.

You may not think these changes are large but lower GDP translates into lower tax revenues, compounding the fiscal problem Minister Willis faces. It appears that some of the Opposition’s estimates of the additional revenue from tax changes were markedly optimistic. Probably – we shall need to wait until May to find out – the gains from cutting some public expenditures, such as on investment projects and social security benefits, have been spent already (e.g. on reinstating for landlords the income tax deductability of interest rates).

In Opposition, the minister said her plans depended on cutting government spending in many areas by 6.5 percent and more, without being aware that previous Minister Robertson had already ordered 2 percent cuts. They are proving difficult to attain. The public sector is not being curmudgeonly. Rather, the government is reluctant to cut programs. Instead, it is requiring substantial productivity increases, which are much harder to get in service industries. (Another possibility is there will have to be cuts in the remuneration of public servants – they will not be compensated by the promised income tax cuts.)

Oppositions tend to be more optimistic, thinking the economy will grow faster under their benign influence. I do not think the prolongation of the current stagnation is anything to do with the new coalition government; business is not expected to revise its investment plans in either direction. On the other hand, there is no evidence the new government has caused the economy to grow faster (sustainably – it can always be boosted for a few quarters).

The National Opposition’s optimism was evident in some of its estimates of tax revenue from others of its policies, with some revenue-raising initiatives even having to be abandoned. So the additional revenues side of their policies is looking weaker too.

There are claims (notably by Winston Peters) that the government faces a huge fiscal deficit if it implements its policy promises. I don’t know whether this is from access to inside information. I’ll wait until the Treasury bean-counters’ figures are revealed.

All this makes the promised income tax cuts difficult to finance without additional borrowing. Minister Willis has already announced she will be borrowing more, with the return to zero net borrowing delayed by one year.

It is all about squaring the circle, isn’t it? So easy to promise in the fantasy of opposition, so hard to attain when you are in the reality of government. It is not just that oppositions tend to be optimistic about themselves. They do not always have the technical capacity to analyse the deeper issues. (One National Opposition spokesperson on finance appeared to be innumerate – as the Labour government gleefully exploited.) We are likely to see similar challenges in the current Labour Opposition.

In opposition, Willis said she would resign if she does not deliver on her promised income tax cuts. Other politicians have made similar promises and reneged on them. That is not an easy course, requiring both courage and political skill. But ultimately it is better for the economy and the nation to live in the reality of government than the fantasy of opposition.

In government, Willis, while denying any fiscal shortfall of the size Peters claims, says she won’t guarantee the promised tax cuts will arrive in July until the policy has been discussed by Cabinet. Perhaps her shift on the state of the economy is preparing the public for moderating or delaying the cuts. If the fiscal situation is proving as difficult as one fears, I hope so.

You will find this columnist criticising the government when politics dominates economic commonsense and approving it when it makes good economic decisions. That does not mean I agree with the values which frame its decisions (any more than I did with previous governments).* In a sense I am like a Treasury official. They accept the political direction of their minister – even when they personally disagree with it – and do their best to design policies to implement their minister’s desires. But the desires are limited by reality; the hard numbers in their accounts and forecasts are a part of that limitation. I guess not a few officials are looking forward to the 31 May budget with apprehension. So should their Minister.

* For example, I am less enamoured with the incidence of the proposed income tax cuts. If they are intended to ease pressures on households from inflation, as the minister says, it might be better to target them more on households paying high mortgage interest rates. But there are not as many votes in such a strategy.

What seemed a booming success a couple of years ago has collapsed into fraud convictions.

I looked at the crash of FTX (short for ‘Futures Exchange’) in November 2022 to see whether it would impact on the financial system as a whole. Fortunately there was barely a ripple, probably because it was too small and most investors were not sufficiently integrated into the rest of the financial system to be borrowing from it to speculate on cryptocurrencies,

Subsequently its founder, Sam Bankman-Fried, was found guilty on seven charges of financial fraud. He comes up for sentencing later this month. My interest was compounded by Michael Lewis’s Going Infinite: The Rise and Fall of a New Tycoon. Lewis, who has a galaxy of impressive books including Liar’s Poker and The Big Short (which was made into a film), seemed quite taken in by SBF, as he is known. Even so, the book provides a valuable background to SBF’s career and FTX, although it was published before the revelations from the trial.

So what went wrong? FTX had some similarities to a bank. Depositing cryptocurrency with it made it easier to transact; its charges were low; it paid interest.

Banks pay interest out of the returns on loans, so what did FTX invest in? Accounts get a bit vague at this stage. At least some of the investments seem to have been in companies on the basis of capital gains. However, we know that there was a substantial commitment to an allied Hong Kong-based cryptocurrency trading firm – Alameda Research – which was given very favourable terms.

When this was discovered, and that there was around $US8b unaccounted for, the fall in confidence had customers trying to withdraw their holdings. It was like a run on a bank – FTX ran out of the wherewithal to pay them and it collapsed into ‘bankruptcy’. Revelations of fraud behaviour soon became apparent and led to SBF and some of his colleagues ending up in jail.

We really do not know just how big the FTX deficiency is; there are even claims it actually has sufficient funds. A run on a bank does not mean that the bank is broke. It may have the assets but cannot liquidate them fast enough to meet depositor withdrawals. Typically, the central bank steps in to support an approved bank – FTX was not.

We do know that the new CEO of FTX, John J. Ray III, who specialises in recovering funds from failed corporations, stated ‘[n]ever in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.’ He said there as ‘complete failure of corporate controls’; FTX’s companies had an ‘absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners’ and ‘did not have appropriate corporate governance’; some ‘never had board meetings.’ SBF agreed in court there was no risk management team at FTX, and apologised for its lack.

Cor!

Rather than detailing further the way that FTX was run, or not run, or the fraud which happened, I ask why would anybody have deposited their assets with FTX? Here are some answers to the question with a common sense response.

Everyone else was doing it. And now they too wish they hadn’t.

It was a big company. It was then, but now?

It was paying good interest. How did you know it was not a Ponzi scheme?

It involved a new innovation. So they told you. Didn’t mean it would work.

SBF was ranked the 41st-richest American in 2022. But not in 2024.

SBF had a great reputation. How many cases do you know of people with great reputations who turned out to be frauds or failures? Read Michael Lewis and, admittedly with hindsight, come away concerned about SBF’s reputation. Alameda Research’s CEO (who was romantically involved with SBF) claimed that his hairstyle and clothes were part of a ‘well calculated’ image.

Why do you trust a conventional bank enough to place your savings in it? Yes, it has a reputation above that of FTX and SBF which is also backed by competent accounting and auditing and a risk management team. Moreover, it is regulated by an independent agency (in New Zealand, the Reserve Bank) which, not incidentally, has to make sure the supervision works because it may have to bail it out. That does not mean that you will never lose (some of) your cash – (see the Deposit Takers Act 2023) – but the probability is very low.

In contrast, SBF built a reputation as an advocate for greater regulatory oversight on the industry while, as Lewis reports, avoiding it. He told a reporter it was all ‘just PR’, adding ‘F**ck regulators; they make everything worse’ and they ‘don’t protect customers at all’.

The critical notion here is ‘trust’. In the distant past there were only person-to-person transactions; each knew the other and could trust them. As the market economy evolved, transactions became between those who were not so intimately known, and eventually with anonymous persons and those who were not even persons, such as corporations. To facilitate those transactions we have public regulation. Sorry about that SBF, you need them to provide a sustainable service.

A jury found SBF guilty on all seven charges. I am not in a position to judge him on criminal fraud but some of his statements and behaviours leave me with the view he was recklessly fraudulent in any practical sense of the notion.

It is not impossible that FTX will have sufficient assets to pay out depositors (but perhaps not the interest owed). However, as one Bloomberg commentator observed, ‘“We lucked into enough money to pay everyone back” is not a legal defence to fraud’ – or a moral one.

SBF said he believed in ‘effective altruism’, which advocates choosing careers based on the amount of good that is expected to be achieved by one’s donations to worthy charities. While SBF made some claims which appeared to undermine such ethics, it is certainly true he gave a lot of money to worthy causes (and not so worthy ones, including political parties). He also gave some to friends, including his parents. I am not judging the philosophy here; one bad example does not disprove an ethical theory – as Christians will explain. But SBF’s career says something about the reality of human behaviour.

The Government says it will give localities more control over healthcare decisions. But how?

New Zealand’s political reflex is that any problem can be resolved by further centralisation. Students will be officially banned from having cell phones at school from Term 2. The decision could have been left to individual schools. Each knows a lot more about local circumstances than the Minister of Education does (or I do). But the New Zealand way is a central directive.

On the other hand, sometimes centralisation is needed. Historically, there has been an ongoing process of consolidation of secondary healthcare. Hence cottage hospitals scattered throughout the country being slowly turned into a nationwide hospital system. Even so, there is a hierarchy among the hospitals. Today a person with a serious heart condition in Nelson – which has as good a provincial hospital as there is – is likely to be flown to Wellington.

Medicine has become more specialised and is evolving rapidly. That suggests that hospital care needs to be built on advanced medical centres attached to a base hospital. At best there is sufficient scale in New Zealand for only five centres offering the specialised levels of care which provincial hospitals are unable to provide: Dunedin, Christchurch, Wellington, Hamilton and Auckland.

Sometimes a single agency makes sense. As much as the Big Pharma are attracted to weak local purchasing, a single Pharmac works for us. Both the interdependence of tertiary and provincial hospitals and the mobility of New Zealanders means the IT configurations among health regions need to be able to talk to each other; currently they can’t.

Even so, the form of centralisation of the system in Health NZ (HNZ) did not seem to make much sense. The most widely used justification for the redisorganisation was the ‘post-code lottery’ – the access to treatment varying by region. The response has been typical of so much policy in New Zealand. A correlation was treated as causation and policy proceeded on the basis that if we abolish regional governance there will be no post-code lottery. No attempt was made to explain the disparity, although it does not take a lot of imagination to think of explanations for the differences which would not lead to a centralisation policy.

Nor does the current centralisation policy remember that while the health redisorganisation of the early 1990s was focused on competition and privatisation, there was also a concern that some areas suffered from a lack of attention from the central hospital. A positive reason for separating Middlemore Hospital from the rest of the Auckland hospital system was that South Aucklanders’ health had been neglected.

The real reasons for policy changes are often different from the stated reasons. A possible reason was that the Ministry of Health was judged to be failing and it was thought better to set up a new agency rather than redisorganise the Ministry. Possibly the shift to national pay-and-condition scales was a consideration in favour of centralisation. The redisorganisation of the early 1990s left industrial relations in the hands of individual CHEs/DHBs. Over time, that decentralisation has been replaced by a system of national awards.

One factor, surely, was that the population-based funding model was failing. It was first introduced in the early 1980s and was, at the time, a progressive attempt to move away from a rigid funding system based on historic proportions. There were later refinements but the formula appears never to have been properly adjusted for the cross-border flows of patients referred by  provincials to tertiary centres, nor for differences in population density and concentration nor for economies of scale.

Crucially, to be equitable the funding formula required that each DHB had a capital structure which generated a similar level of productivity together with the assumption that the shocks each DHB experienced were small. Both assumptions were wrong as vividly illustrated when the Canterbury DHB faced the aftermath of the Canterbury earthquakes and the Mosque Massacres. The new system is not bound by the old funding formula and may be able to refine it, although it may end up making ad hoc decisions responding to perceived short-term pressures.

The latest redisorganisation does not really address these concerns. Rather, HNZ has been charged with designing the new system. One advantage it has is that it is gaining hands-on experience, unlike most top-down organisations charged with redisorganisation. But the pressures of dealing with the minutiae of that experience may divert its attention from the overall picture. Without external pressure it is unlikely to unwind if it discovers it is overcentralised.

But is HNZ hands on enough? It has a hierarchical structure which means that, as is common among generic managers, the leadership does not connect well with the knowledgeable below. HNZ need not listen to the hospitals it runs. The new organisational structure adds at least one further managerial layer into the system.

In an RNZ interview that got overlooked in the rows over scrapping the Māori Health Authority and the existing smoking reduction policies, the new Minister of Health, Shane Reti, says he is shifting more health decision-making back to the regions. ‘There are some parts that need to be owned by the centre, absolutely, but we need to be very careful because what has happened here is we’ve lost local accountability. We’ve lost local decision making and it’s all owned by the centre.’ He stopped short of saying district health boards would be reintroduced but said IT systems and key services like radiotherapy machines were examples of what should remain centrally managed.

What the minister has in mind is unclear. Giving the local health deliverers more autonomy may sound an excellent idea but how are they to be held to account? The Minister appears to have ruled out elected boards (last introduced by the Clark Labour Government and revoked by the Hipkins Labour Government). I am not particularly sympathetic to such boards, having had friends elected to them who felt they had little influence; those with greatest integrity chose not to stand again.

Nor do I have much sympathy for the fashion of introducing targets. We have had a lot of experience with them in economics summarised in Goodhart’s Law that when one specific goal is set, people will tend to pursue that objective regardless of the consequences. An example was that when emergency departments were given a target time for processing admissions, cases were left in ambulances outside, only being admitted when the target time could be achieved. Never forget Gilling’s Law: ‘the way you score the game shapes the way it is played’.

(The government’s announced five targets are hardly inspiring. Only one addresses primary care and that – ‘95 percent of children to be fully immunised at 24 months of age’ – while worthy, ignores the numerous recommended vaccinations for adults and older children, not to mention a multitude of general practice issues.)

Ian Powell’s sober assessment of targets concludes more sympathetically towards the previous Labour Government’s indicator approach than the Key-English one of hard targets.

The problem arises because a health system, like an economy, has multiple objectives which cannot be reduced to a single number in the way a business has a profit concern. (Even that gets corrupted by financial chicanery.) Simplifying the multitude to a single measure – as with the focus on changes in real GDP – is simple, foolish and distorting.

It is unreasonable to expect a new government to have fully formed its views its first hundred days – being in government and doing things is so much harder than being in opposition and criticising. It would be good if this one decides to pursue a culture change in which local generic managers focus on supporting those who deliver health care to individuals. That is a long way from a philosophy of centralisation.

Not so much from a lack of nominal income but from rising mortgage interest rates

The just released Statistics New Zealand (SNZ) estimates child poverty for the year ending June 2023 show the proportions of children on nine different poverty measures are higher than they were in the June 2022 ending year. SNZ warns that the increases are not large enough to outweigh the sampling error but here I accept the conclusion as meaningful and discuss why.

(Each indicator in 2023 is below the 2018 measure, when the SNZ first began measuring. Even so, the data is not on track to hit the child poverty reduction targets set out in the 2018 Child Poverty Reduction Act.)

Some readers may find the next few paragraphs a bit tediously data (and definition) driven. If you trust the analysis – you shouldn’t without checking it – you might skip to the next italicised paragraph – eight paragraphs down – which provides a conclusion.

Average annual household equivalised disposable income (before housing costs) rose 7.0 percent between June 2022 and June 2023. The Consumer Price Index (CPI) rose 6.8 percent. Seems households are fractionally ahead?

I am now share with you a secret. The CPI does not reflect all the outgoings of households. Very importantly, it omits mortgage interest outlays. (There is a complicated story why it is omitted.)

Now mortgage interest rates rose sharply during the period. For instance, floating rates on new mortgages increased from 5.0% p.a. for the year ending June 2022 to 7.5% p.a. for the year end June 2023. According to SNZ, all household mortgage interest payments jumped 50 percent.

SNZ also produces a Housing Living Cost Price Index which includes mortgage interest payments, but it is rarely reported. According to the measure, between June year ending 2022 and June 2023 household prices rose 7.7 percent, almost 1 percentage point higher than the CPI rise. It is also greater than the 7.0 percent rise in incomes. The rise in poverty is now less surprising.

The interpretation of the household equivalised disposable income figure of a 7.0 percent rise in incomes assumes that mortgage interest payments are spread evenly through the income distribution. SNZ estimates that there are an extra 12,000 children in poverty between the two years. (This uses a poverty line based on 50 percent of median (equivalised) household incomes.)

But households with children are more likely to have mortgages, so they are likely to be hit more heavily by the rise in interest rates. SNZ also provides an estimate of the change in all household incomes if housing costs (including mortgage interest) are deducted. It showed an increase in disposable income after housing costs of 4.4 percent, well below the 7.0 percent increase of incomes before housing costs and the various price index increases. When SNZ allows for this, it estimates that there were an additional 36,000 children in poverty – the increase is as common sense would predict.

Working with a large data base sometimes results in conclusions inconsistent with common sense. Usually that is because one has made a mistake or an oversight. This column simplifies how tricky the analysis can be. I did a lot of cross-checking. I have put some of the results in an appendix.

SNZ also provides another estimate of poverty, based on asking households whether they are having to make serious cuts in their spending. On their preferred measure they think ‘hardship poverty’ among children rose 23,000, from 10.5 percent of all children to 12.5 percent. Different poverty line, different level, but a similar increase in the poverty rate.

The above analysis, and the appendix, shows that the rise in child poverty was not so much weakness in income growth. Rather the evidence points to rising mortgage interest payments.

We know why interest rates have risen. The Reserve Bank has been increasing them to restrain the economy in order to reduce inflationary pressures. (World interest rates rose in the same period for similar reasons.) I do not want here to get into the intricacies of this macroeconomic-monetary policy, but to draw attention to the way it impacts on the income distribution (as most policy changes do).

It is ironic that among the people most impacted by the policy are the most defenceless and innocent – children. John Kenneth Galbraith once said that the unemployed were employed fighting inflation; so, apparently, are children.

If you raised the issue with the Reserve Bank, I would expect it to say something like while it is aware of distributional issues, its legislation charges them with restraining inflation but has no mention of doing so fairly or taking the concerns of the weak into consideration. That, the Bank would probably say, is the responsibility of Treasury and fiscal policy; in any case it has no policy instruments to directly modify the income distribution..

We sort of recognised this when both National and Labour campaigned on raising Working for Family (WFF) payments. Note that WFF does not target families paying mortgages. It is hard to think of a viable fiscal instrument that would. WFF is intended to benefit many families with children, so a hike is likely to reduce child poverty to some extent. We shan’t know until February 2026 (and there may be other factors that will increase it).

What surprised me when I did the above analysis is that the evidence is that, until June 2023 anyway, there is not a special case that households need income tax relief. There are always demands for cuts, of course, and National campaigned on income tax cuts. It is quite likely that they had not looked at the evidence – who does? Their promise to cut income tax may be based on the ideological desire to reduce the scope of the state and increase the size of the private sector – an honourable political ideology (although not particularly mine). Thus their decision to stop indexing benefits to rising average wages, returning to indexing by the CPI, even though it will increase child poverty.

My guess as to what is currently going on in tax policy is that state sector spending is proving much harder to cut than promised and the economy seems to be deteriorating more than expected. That is going to make it much harder to deliver the promised income tax cuts within the coalition government’s promised public debt target.

If the public debt track is higher, it will be paid for in the future by today’s children. If the Reserve Bank decides that requires a higher interest rate track, it will be paid for by today’s children. If we get the macroeconomic stance wrong and unemployment rises, the income cuts will be paid for by today’s children – in part anyway. Funny, isn’t it, how often the frontline payees are the weak and innocent?

There are two appendices. One reports on the data I used in the above analysis; the second is some notes on disability and poverty.

Appendix I: Changes Between the June 2022 and the June 2023 Year

Consumer Price Index: up 6.8 percent.

Housing Living Cost Price Index: up 7.7 percent.

Household (Equivalised) Disposable Income: up 7.0 percent.

Household (Equivalised) Disposable Income after deducting housing costs: up 4.4 percent.

Ordinary-time hourly wages: up 7.3 percent.

The minimum wage up 10.8 percent (but not everyone on the minimum wage has children).

The net social security benefit for sole parent support: up 8.1 percent, and the family tax credit up by 11.4 percent (these are but representative of benefits generally).

The unemployment rate went up from 3.25 percent to 3.43 percent (or about 13,500 souls). (Some research I did many years ago suggested that incomes at the bottom of the distribution were very sensitive to unemployment, but my study focused on far bigger changes than have occurred recently.)

Appendix II: Disability and Poverty

According to the SNZ data, the proportion of children with a disability living below the poverty line (defined as 50 percent of median equivalised disposable household income) is much the same as the proportion for non-disabled children. (They are reported as about 1 percentage point higher over the last four years). However, on the measure of severe material hardship the proportion of disabled children in poverty is about two-and a half times that for the non-disabled children (5.7 percentage points).

This is no surprise. Disability generates additional expenses. We make no adjustment for this in the poverty-income measures.

We knew this when the poverty measurement paradigm was developed five decades ago. But we have hardly progressed our thinking since. Over the five decades we have never taken serious research on poverty seriously – it just has not been a research priority. The weak missing out again?