Finance Minister back to his old ebullient self — but what’s happened to NZ’s economy?

Finance Minister Grant Robertson confirmed in Parliament this week he is  back to his old ebullient self and exuded good cheer when questioned on the state of the NZ economy, though he  did note, almost as an afterthought, forecasts for the global economy are being revised downward, and this will affect NZ’s prospects.

 How come? You might ask.

He cites ANZ’s economists as saying that NZ’s “extraordinarily strong labour market means households are, on average, starting from a good place when it comes to income growth and job security”. They are forecasting a steady decline in inflation, from a peak in the June quarter and with positive real wage growth improving from here.

This, he  says, will help New Zealanders with cost of living pressures.

Continue reading “Finance Minister back to his old ebullient self — but what’s happened to NZ’s economy?”

Liz Truss – living in interesting times

Despite the buffeting, politicians in recent years have done a surprisingly good job at seeming to be in charge.  Of course the markets and central bankers have helped them out a bit.  

So it will have come as a shock to Britain’s PM (for now) Liz Truss, that things could fall apart so quickly, and so very comprehensively. 

Continue reading “Liz Truss – living in interesting times”

Truss government definitely helping some people

Who would have thought a change of leadership in Britain could bring so many problems.  Wait a little and PM Liz Truss will be blamed for an outbreak of bubonic plague.

Still it’s natural that the people responsible for the problems accumulated over the last decade – and accelerated during Covid time – are seizing the opportunity to pin the blame elsewhere.

Indeed, if you’re hoping it’s just a British thing you should be very worried by the growing number of prominent international centrists using this opportunity to burnish their own defences (see Larry Summers here and Jason Furman there) at the same time as putting in the boot.

The latest niggle is over the policies of Britain’s (boring, long-term, stable, highly-regulated) pension funds and their (boring etc) investments in government bonds.  Those most eager to see the government’s incompetence in everything might ask themselves why an industry which deals in lifetimes is apparently having difficulty dealing with not-entirely unexpected short-term market fluctuations.

They might even get the depressing vibe that all this is only the beginning of a torrent of problems, all demanding government attention – which really means money. (Yesterday’s announcement that Britain’s health service is bleeding out – even before the Truss government does – can be seen as the latest instalment in a never-ending saga.)

And which will all need to be paid for – as the markets reminded Truss.

The irony of Truss trying to get ahead of the problems but instead being sandbagged by them is well covered by Allister Heath in Britain’s Daily Telegraph.  But amusing visibility hasn’t made them easier to deal with.

So, like just about everyone else, Britain’s government is spending too much; it’s also taxing too much but still not enough to stop debt growing.  Interest rates going up will make the problem worse, while hammering the living standards of mortgagors; but the lure of more directed credit will eventually hammer growth.  

Meanwhile, low levels of growth in output and living standards look like getting worse.  But governments have spent years encouraging distortions which are now revealing their destructive potential –  substantial decreases in the productive labour force post-Covid; a growth in union militancy; business investment driven by cosy regulatory partnerships rather than market opportunities.  It has reached the stage that when the market delivers a rare positive shock, as with some energy producers, the first and loudest cries are for a windfall tax.

Any challenge to this status quo was bound to generate howls from the many craving protection or other privileges.  But it was less predictable that it would generate civil war in Truss’s own Conservative party.

Because surely the milk can’t be unspilt.  If the government limps back to the current orthodoxy, they risk becoming a less-convincing version of the Labour party.

But the task of imagining – let alone creating – a growth coalition has been shown to be daunting.

Working people need to be brought to the realisation that otherwise the future looks like more taxes and worse services.  Right now many cling to the hope that a few more rules and a few more taxes on a richer neighbour might do the job.  

Business will only come on board when it makes more reliable long-term profits by taking risk, than from closing it down by regulatory collusion.  

Beneficiaries ranking low in the priority of the orthodox woke will need to understand that their votes are more valuable elsewhere. 

And realistically these changes of outlook will probably only come as the wreckage of existing policy drifts ashore.

The recent dramatic changes in the cost and difficulty of securing carbon-based energy have, for example, served to bring into clear focus the even greater costs of marching to a bureaucrat’s carbon-free specification.  Some are even starting to understand that on current trends such a policy means a real decline in the quality of life (it’s one thing to imagine living car-free; another to have it imposed by London’s current mayor).

Perhaps the Truss government needs a string of global economic disasters to start making its points for it.

We can be confident that Vladimir Putin and a few other folks will be looking to help out on that one.

Eric Crampton: Government should not profit from inflation

 

Dr Eric Crampton  writes:

The Crown Accounts are in better shape than had been expected when the Budget was set.

That’s the good news.

But the Reserve Bank this week warned, while increasing interest rates by 0.5 percentage points, that “overall spending continues to outstrip the capacity to supply goods and services.”

The deficit still stands at $9.7 billion dollars. Core crown expenses, in 2022, were some $17 billion higher than they were in 2020 and 2021, when lockdowns and wage subsidies warranted substantial fiscal support.

Fiscal policy continues to provide too much stimulus in an overheated economy. Continue reading Eric Crampton: Government should not profit from inflation

Shortest tax cut in history a harbinger of our own future political difficulties?

Real change can be a profound shock.

One response is to hunt for the trigger.  Another is to point out the contrast with past ultimately-failed efforts to shore up the status quo (and marvel at all those ‘total overhauls’ of the deckchair sector).

This could be a useful framework to examine the ferocious response – both from the political establishment and the British public – to the Truss government’s start of a real overhaul.

Continue reading “Shortest tax cut in history a harbinger of our own future political difficulties?”

Brotherhood of Europe but Sisterhood of Italy

All European elections are about Europe.

That’s one conclusion which might be drawn from the decimation (a fine Latin term that) of Italy’s governing class – and also the election of a centre-right coalition government – last Sunday.

To understand more, recall the previous election in 2018.  That also turfed out the ruling establishment (and again in 1994, where Italians opted for the fresh and untarnished Silvio Berlusconi, if your memory can bear going back that far).

Last time, the two biggest and newest parties – the right-populist League and the left-populist Five Star Movement – joined in an unstable coalition.

Continue reading “Brotherhood of Europe but Sisterhood of Italy”

The PM has basked in the glow of approving publicity overseas – but the dollar’s dive should bring her back to earth

Prime Minister Jacinda  Ardern  has won lots of favourable publicity, while attending  the  Queen’s funeral  in London and the  UN  General   Assembly  in  New York.

It was  a  sombre  mission  in  London,  less  so  but  no  less  tiring in  New  York  (although the nuclear threat from Russia was sobering).

On  both  occasions, Ardern has represented  the country so  outstandingly  that  New  Zealanders  for  a week  or  two  might have  overlooked  how   poorly   the government  has  been performing  at  home.

Indeed,  one  commentator – Matthew  Hooton  in  the  NZ  Herald –  suggested that if  NZ  became  a  republic  he  would back  Jacinda  Ardern  for president.

Nobody,  he says, better  personifies  contemporary  New  Zealand globally and  in  national celebration or  grief. Continue reading “The PM has basked in the glow of approving publicity overseas – but the dollar’s dive should bring her back to earth”

Five paths for China – none of them look good

The what-will-happen-to-China’s-economy debate seems a bit stale these days.  

So thanks are due to Michael Pettis,  a professor of finance at Peking University’s Guanghua School of Management, for coming up with one of the more plausible models of the Chinese economy.

His insight is in his analysis of the relationship between the private and state sectors.  And it seems a little more convincing than the far-seeing technocratic genius stuff so attractive to international bureaucrats and journalists.

Continue reading “Five paths for China – none of them look good”

After the mourning, the problems are back

As new PM Liz Truss leads Britain in mourning the Queen, her problems are not diminishing.

But one decision which her new government managed to implement just before the Queen’s death was the sacking of Treasury Secretary Tom Scholar.

Critics of the move dubbed him the foremost civil servant of his generation.  Naturally enough.  

But they are probably right.

What makes it even more curious is that in addition to a steely grip and overflowing ability, Sir Tom is also preternaturally likeable.  He must be the first Treasury Secretary to get on with everyone – and give every appearance of liking it.

After an all-nighter at the height of the financial crisis, he took the time to pen a graceful, lengthy, name-checked and analytically impeccable thank you note to all staff.  Before dashing off to his next briefing.  That class gets noticed.

But perhaps he didn’t get on with everyone.  The Times reminds us that Truss spent two years as a senior Treasury minister.  

The official line is the need for a break with Treasury orthodoxy.  And there’s more support for this than you might think (or perhaps not).  

For example, Eurointelligence’s Wolfgang Munchau:

“There is a modern version of the Treasury view, as exemplified by Scholar and other civil servants in his department, the view that got Rishi Sunak to raise national insurance and corporation tax. We see those tax rises as right up in the annals of bad economic policy decisions on par with the early Thatcher government’s excessive monetary and fiscal tightening as the country went into recession”

Oh. And then:

“We keep an open mind on the Truss experiment, the biggest fiscal policy expansion in modern UK history.”

But you might also think that a top-line official like Scholar, after you had rejected all his orthodox arguments, would be the indispensable man for implementing your bold and courageous (i.e., high risk) policy.

The underlying issue (which Munchau also probes) is getting to grips with the relationship between government and its advisers – poor before Brexit and now dysfunctional.

“The reason why Brexit requires civil service reform is that Brexit requires a re-write of the most important regulations the UK inherited from the EU … two years is long enough to provide the underpinnings of a workable Brexit: a re-organisation of the civil service, or at least a change in the top tiers, followed by regulatory reforms.”

Most astute.  And it will require a great deal more than sacking one of the few top civil servants who probably understands the argument.

Because much of the unhealthiness of the relationship is in the failure of civil servants to give sound advice on policy cause and effect in markets, and for ministers to demand and use it.

The UK energy crisis is a reliable example.  Governments of all stripes wanted everything: high prices to drive innovation and saving; low prices to keep energy hogs happy; wasteful and undemanding energy efficiency programmes; while skimping on energy security.

They were abetted by their advisers and rent-seeking lobbies.  Policies were generated in sequential isolation and bent to wishful thinking, without an overarching understanding that transitional energy markets would be unpredictable, and a long-term market-driven transition needed a predictable government posture on supply security and the carbon price.

If you accept this, the Truss administration’s response is not exactly covering itself with glory.

They plan to fix the current power price below market level to encourage overconsumption this winter. Then presumably try to recover the enormous subsidies with energy taxes in later years.

I suppose you could argue that this is the logical culmination of the expensive energy policy for Western countries enshrined in the Paris Accords.  

And that it sends an unambiguous signal to average Brits that power will cost at least twice as much as before, and you need to go back to heating one room and turning off the lights (that’s assuming you can’t knock down your Victorian terrace house and build an eco-apartment).

But the problem with the government’s taking full responsibility for tinkering with market adjustment is precisely its ambiguity.  Because how do you know policy stability will survive the next crisis?

Truss and her ebullient new finance minister Kwasi Kwarteng (and presumably also her next Treasury Secretary) will be hoping that avoidance of fiscal orthodoxy and deregulation of productive sectors will pay for the continued regulation of the politically sensitive.  

As Munchau says: keep an open mind.

How Ukraine could do Govt a favour by beating the Russians and (all going well) taking the pressure off food prices

Deputy PM Grant Robertson only  last  week was  telling Parliament his economic policy has led to “strong outcomes”, including  inflation below that of many of the countries we compare ourselves against.

This  week  StatisticsNZ  reported food prices had their biggest annual jump in 13 years last month.

Food prices shot  up 8.3% in August compared with the same time a year earlier, Stats NZ says.

It is the largest year-on-year increase since July 2009, when prices were up 8.4%. Year-on-year, fruit  and  vegetable prices  have  increased  15%. Continue reading “How Ukraine could do Govt a favour by beating the Russians and (all going well) taking the pressure off food prices”