Last week (The Ponzi financial model and New Zealand’s monetary policy) I described New Zealand’s place and financial strategy within the world’s financial ecosystem; how New Zealand pursues a ponzi financial model, and how that model has played a role in offsetting the ‘mercantilist’ financial strategies of other countries (examples given were Denmark and Netherlands). (See New Zealand chart, noting the persistent inflow of foreign money.) In this kiwi case, New Zealand takes the role of ‘player’, with Denmark and Netherlands taking the ‘investor’ role.

The net effect of this monetary strategy has been East Asia (especially from 1993 to 2009, see Malaysia example) and  Northern Europe (especially this century, see Netherlands example) supplying foreign aid to New Zealand, with the beneficiaries of that ‘aid’ being New Zealand elite consumers. There has been a substantial domestic cost to New Zealand arising from the strategy; a cost which has manifested as substantial entrenched inequality and poverty.

Of course, New Zealand has not been not the only recipient of such unconditional ponzi-style ‘aid’. Other recipients have included Australia, the United Kingdom and the United States. (We may note that Australia is moving away from the ponzi model, though indications are that Canada has adopted it post-2008.) While the United Kingdom and especially the United States have been exceptional cases in other respects, they have both played key roles in balancing the world system. (The United Kingdom is exceptional because it has a financial realm which extends very much beyond its formal borders. These are essentially offshore tax havens. The financial fingerprints of Jersey, Guernsey, Isle of Man, Cayman Islands and Gibraltar almost certainly look more like that of Switzerland than that of the United Kingdom. For the United Kingdom, financial statistics must be treated as incomplete. See my Interesting Financial Fingerprints: Malaysia, Switzerland, United Kingdom, Israel, Evening Report, 30 October 2023.)

Japan

It’s time to see the role of the US, but before that to look at Japan as the truly exceptional country that shows the rest of the world how it could have been managing its public finances.

Japan Incorporated experienced a ‘balance-sheet recession’ through the 1990s, following a few years in the late 1980s and early 1990s of extraordinary exception; a short period of financial speculation run riot – fuelled by a significantly overvalued yen – and in which the lands of the imperial palace in Tokyo were said to be worth more than California.

Japan developed a way of dealing with its first-world financial problems by creating a new financial model, although it must be said that the United States has long deployed aspects of this pro-deficit approach. This new model, which consolidated in Japan as ‘Abenomics’, suits both these countries (the two largest liberal economies in the world), both of whose citizens strongly resist increases in taxation. Abenomics is characterised by what we in the west would call persistently easy monetary and fiscal policy. Japan’s interest rates have been below 1% since 1996. For half the time this century Japan’s interest rate has been zero, and since 2016 Japan’s interest rate has been negative. Japan’s interest rate is still negative. The last time Japan faced a significant financial crisis was 1998, thanks to its position in Asia; Japan weathered the 2008 global financial crisis very well.

Looking at the Japan chart, the dominant feature since 1993 has been the huge private savings being channelled directly into government spending, with the full participation of Japan’s citizens and businesses. Whereas New Zealand actively participates in a globally-oriented ponzi financial model by setting interest rates always high enough to draw in foreign savings, Japan operates a sophisticated and benevolent domestic ponzi model.

In Japan the ‘player’ is the government and the ‘investors’ are the citizens and businesses. Rather than be taxed more by the government, Japanese agree to lend large portions of their unspent incomes to the government, and with wholesale interest rates at zero percent, or less! This is truly astonishing in terms of the usual rhetoric of finance that western populations are subjected to.

It works of course because the Japanese people prefer to lend to their government instead of having that income taxed. It’s win-win. The government gets to spend the money on all sorts of public good systems and projects – as well as on World Cups and Olympic Games – while the money remains available for savers to spend should they experience ‘rainy days’ or should they want to travel or buy a car or buy a house. (It works like a cheque account; while borrowers spend the money, it remains fully available for the account holders to also spend it.)

The downside for Japan is that its cheapness (low cost of living, not low quality of goods) makes foreign travel – and imports – expensive. And then there’s having to put up with the tut-tutting from the west about Japan’s huge government debt. Nevertheless, everybody in the world who can be bothered to observe what financial success looks like understands that Japan’s government can service its debts to its own people. Japan’s government is as far from being bankrupt as any government can be. (In New Zealand’s final political debate before the 14 October election, Prime Minister Hipkins acknowledged Japan’s success by claiming that New Zealand’s economic growth was second only to Japan. Hipkins was not in fact correct; USA had higher growth in mid-2023 than either New Zealand or Japan.)

Japan’s government debt is stabilising at below 300% of GDP. It means that the Japanese government can run substantial budget deficits indefinitely. We should note that, in the 2020s, Japan’s interest rate has remained negative, and that inflation, which maximised in January 2023 at 4.3%, is now 3.0%. Japan’s very cheapness means that it cannot but help running balance of trade surpluses on an ongoing basis. Meaning that Japan becomes an ‘investor’ in New Zealand’s version of the ponzi game.

United States – USA

The final country to mention is United States, which plays both kinds of ponzi game; the New Zealand global version (USA Inc. is the player) and the Japan domestic version (US Treasury is the player). It has to. The United States financial model stabilises a world system destabilised by mercantilist ‘anti-players’ such as the European Union.

It’s just a huge pity that United States government spending is so focussed on war rather than peace. Indeed, the twentieth century wars in Iraq and Afghanistan were entirely funded from foreign savings being channelled into the United States Treasury. It is truly remarkable that the United States has been able to cut taxes while escalating foreign wars.

The United States’ ponzi economy acts as the world’s consumer of last resort; a situation necessitated by the extensive mercantilism elsewhere (especially the European Union), and by virtue of the $US being the world’s reserve currency. And the wars in Iraq and Afghanistan can be understood as ‘last resort consumption’. (We note that military consumption is easily the ‘least-green’ of all kinds of consumption. Fortunately, Japan has been constrained – by others and by itself – from indulging in military consumption. And we may note that in the early 2010s China shared the role, with the United States, of ‘consumer of last resort’. The least green type of production is probably mining; including the mining of crypto-currencies such as Bitcoin.)

The global economy’s woes have been compounded by an aggressive and totally misplaced United States monetary policy; a policy that has sought to induce a global recession by forcing other countries into believing that they also had to raise interest rates aggressively to ‘deal to’ a global ‘cost of living’ problem; a problem that transparently began with the Covid19 pandemic (especially the political ‘mission creep’ which generated a degree of economic paralysis in the world) and came to a head with the US-perpetuated Russia-Ukraine military stalemate. The trifecta of costs was completed by the raising of interest rates in most of the world. The cost-trifecta – the source of the coming stagflation crisis – has been pandemic-related paralysis in 2021 and 2022, war in 2022 and ongoing, and the US-led assault on interest rates from late 2021.

As the global system plays out at present, the United States is trapped in its role as ponzi-player-in-chief. The world will be a better place when the United States plays ponzi in a responsible way, as Japan does. Even better, the United States could be facilitating the intellectual leadership required to lead the world away from mercantilist growth economics. The mercantilist countries prioritise economic growth, and achieving that growth through export surpluses; hence the need for a consumer of last resort. It’s a global economic model that has become completely unsustainable; and which finances the cruel wars which the United States subscribes to.

*******

Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

On 26 October I wrote about New Zealand’s exceptional financial model, showing it to take a similar (though non-fraudulent) form to a Ponzi Scheme (The Ponzi financial model and New Zealand’s monetary policy). And I showed how this kind of financial behaviour by a nation-state could help to stabilise a world economy when some other national economies pursued a strongly contrasting model. I call the two models the ‘ponzi model’ (with New Zealand as exemplar) and the ‘mercantilist model’ (with Denmark and Netherlands as twenty-first century exemplars).

Malaysia, here, is a country which switched from the excesses of one model to the excesses of the other, before reaching a  neutral position after the 2012 Eurozone crisis.

In the Malaysia chart, we see Malaysia adopting the ponzi model around 1990. The telltale signature is the persistent amounts of foreign money (green) going into Malaysia’s private sector (blue), with the government creaming the resulting money-go-round, running fiscal surpluses (red).

Malaysia was one of the countries which precipitated the Asian financial crisis late in 1997. Having to pay back much of the debt incurred in the 1990 to 1997 ponzi period, we see a massive switch to private sector saving paying back much of the foreign debt incurred and then saving by accruing foreign credits.

For 14 years, Malaysia kept up an extreme form of the mercantilist model, which has foreign deficits as its main feature (which means current account surpluses). This 1998 to 2011 signature is one of high saving (blue), exports exceeding imports (green), and the export of material living standards (green) to countries like New Zealand. Fiscal policy (indicated by red) followed closely to global norms; annual government deficits of about 4% of GDP.

This pattern continued in Malaysia until 2012 when mercantilism became the collective financial policy of the Eurozone countries. After 2012 the East Asian trade surpluses got smaller, as these countries increasingly looked to domestic markets to keep their economies growing. (The last three years, of course, is the Covid19 pandemic, a period of increased government deficits.)

(Malaysia, by the way, has an interest rate of 3%, and which has not gone above 3.25% in the last 10 years. Its inflation peaked at four percent in 2022, and is now 1.9%. Its government debt is 60% of GDP, nearly twice as high as New Zealand’s. Its neutral post-2012 financial model is delivering for Malaysia.)

Switzerland is exceptional in that it is the world financial centre, par excellence, and is the headquarter country of global corporates and world governance agencies (including much of the United Nations).

Thus, Switzerland makes large global profits which are deployed all over the world, hence the persistently strong savings (blue) and foreign deployment  of those savings (green). While it has the look of a mercantilist country (like Netherlands), its special circumstances with respect to the global economy mean that this is by circumstance rather than by design.

Fiscal policy is passive in Switzerland. It does not make any fetish about the desirability of governments running financial surpluses. It’s government debt, much greater than New Zealand’s in dollar terms, is 41% of GDP, compared to New Zealand’s 36%.

Switzerland’s interest rate has been minus 0.75% for most of the last ten years. For half of that time, its inflation rate has also been negative. For much of the time its interest rate was similar to its inflation rate; in the late-2010s its inflation rate was positive, though under one percent. Its current interest rate is 1.75% and its inflation rate is 1.7%. The main reason for its low inflation has been its low interest rate. Unlike New Zealand, Switzerland has not created a domestic cost of living crisis, because it did not raise its domestic interest rates.

The United Kingdom shows aspects of New Zealand’s ponzi model; in particular it is a recipient and spender or foreign savings, especially this century. However, United Kingdom no longer pretends that fiscal (government) surpluses are necessary. Although David Cameron’s government (2010-2017) did misguidedly try for a large dose of government austerity, known there as ‘fiscal consolidation’. The United Kingdom is also notable in that it does not accrue large private debts in the way New Zealand does.

The United Kingdom is exceptional in that not all that country’s economy is covered by its national statistics. The United Kingdom economy includes a range of realm countries – such as Jersey, Guernsey, Isle of Man, Cayman Islands, Gibraltar – some of which are tax havens with economies with which contain a disproportionate part of the United Kingdom’s financial activity. So the United Kingdom’s chart is in fact incomplete; invisibly offset by these other countries which do not keep comprehensive statistics, and which most likely all have financial balances like Switzerland.

The United Kingdom has interest rates and inflation rates similar to New Zealand. Its current interest rate is now 5.25% and inflation rate is 6.7%. As with New Zealand, it has a hawkish monetary policy (anti-inflationary in dogma if not in reality); an excessive readiness to raise interest rates (with, as in New Zealand, unstated additional motives for this policy) created and perpetuated its cost-of-living crisis.

Finally, Israel is a mercantilist nation with a mercantilist mindset. It’s a financially conservative country, with private sector surpluses and savings deployed to other parts of the world. But you will see that it has substantial government deficits. In this respect it is like the United States, and of course (like the USA) the red in Israel’s chart shouts ‘defence’, or at least a very well-funded military sector. While Israel is a net exporter – hence the green on the lower portion of its chart – it is of course a recipient of foreign aid in the form of grants (mainly from the United States) rather than loans.

Israel’s inflation peaked at just over five percent and the interest rate is now 3.8%. From 2014 to 2021 Israel’s inflation varied between minus 1.5% and plus 1.5%. In that time interest rates were between 0.1% and 0.2%. Israel did not have an inflation problem, despite its high levels of government spending. Its government debt is 61% of GDP, twice New Zealand’s. (Government spending, per se, is not the cause of cost-of-living crises; although government spending without outcomes can be a contributing factor to inflation.)

Nobody would accuse Israel of unsound finance. But it does have very different monetary and fiscal policy agendas than New Zealand. And Israel is closer to the world’s norms than is New Zealand. For Israel’s first-class citizens – the majority of the population in its less-disputed territories, along with a minority of the population of occupied Palestine – there is markedly less inequality.

*******

Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Political Roundup: Will the Govt act on mega bank profits and reform the banking sector?

The corporate retail banks are making mega profits on the back of Government policies and indirect subsidies of recent years. As a result, there are calls from across almost the whole political spectrum for greater regulation of the banking sector, including windfall taxes. But will outrage turn into action?

Prime Minister Jacinda Ardern led the charge against the banks this week, warning the likes of ANZ – which announced recently that its profits were up 20 per cent to a record $2.3b – that they are at risk of losing their “social license” to operate here. The Prime Minister sounded tough, but she was also quick to admit that she has no intention of taking any action or changing the rules. The Finance Minister Grant Robertson was also fast to rule out any reforms or further investigations.

Critics have said that Ardern’s plea for the banks to have “self-reflection” is wishful thinking in the extreme. The Green Party’s finance spokesperson Julie Ann Genter put forward this analogy: “Expecting banks… to put people ahead of profit would be a bit like putting the fox in charge of the hen house.”

National, too, is pressuring the Government to act, with spokesperson Nicola Willis saying a full investigation needs to be launched into the banking sector, including whether government monetary policy had contributed to the mega profits.

Why won’t the Government act?

Claire Matthews, a banking expert at Massey University, has accused Ardern of grandstanding on the issue, suggesting that if Labour really thought the mega profits were a problem, they would be doing something about it. She suggests today that Ardern is just being an opportunist populist and electioneering: “People like to hate the banks so it’s quite an easy win for the Government.”

Looking at the lack of substance from Ardern on banking, one leftwing blogger wrote yesterday on Labour’s banking policy: “this is why Labour deserves to end up in opposition after the next election: they’re all noise and no policy. They’re offering us literally nothing, just the same tired, unjust status quo.”

Sam Stubbs, Chief Executive of KiwiSaver provider Simplicity, is reported today as saying: “The PM talks about the social license to operate. There seems to be quite a bit of hui but not much doey from the Government on bank reform.”

Stubbs is rather scathing about the dissonance between Ardern’s bank-bashing and her own governance of the banking sector: “These are nice sound bites but so far what the Government has done is slap the banking industry with a wet bus ticket all through the pre-Covid profit period when it was huge, all through the Australian banking inquiry. They then provided them with a massive amount of free money during Covid.”

The Government has handed the banks the mega profits

Stubbs’ critique of government subsidies of the banks is important. He says: “They have received a tremendous amount of tax-payer-funded support. How do they reward us? By making record profits when everyone else is doing it hard.”

Business journalist Bernard Hickey also argues that the big banks have essentially been subsidised by the taxpayer in recent years. Today he writes that “The big four banks got massive help to grow their lending & profits from the Govt in 2020, 2021 & 2022. They get their licenses to print money from the public.” He argues that mega bank profits have been made because of the Government’s “$55b of money printing, abandonment of LVR controls and $16.4b of subsidised lending by the Reserve Bank to banks through the Funding for Lending scheme”.

Hickey also explains that the banks have benefitted from a government guarantee of their sector: “the banks benefit from an implied and unfunded Government guarantee to protect them, especially now the Government is building a deposit guarantee scheme and especially after the Government’s actions during the Global Financial Crisis, when the Government created retail and wholesale deposit guarantees in 2008/09.”

Quite simply, banks have always been keen to privatise the profits from their role in the economy, but then socialise any losses – by getting the state to bail them out and to guarantee their operations.

New Zealand Herald business editor Liam Dann makes some similar arguments today: “Billions of dollars were pumped into the economy by Government and the Reserve Bank to save businesses and jobs and avoid a crisis. A side effect of the stimulus was a property and savings boom through 2020 and 2021. That’s now had the galling result that a sizeable chunk of that cash looks set to line the pockets of Aussie bank shareholders.” And he adds, “When things actually go wrong, taxpayers have to bail them out.”

Leftwing political commentator Gordon Campbell also points to Government policy as behind the mega bank profits: “The banks have reaped the rewards of the government’s successful efforts (e.g. the wage subsidy scheme) to keep the economy relatively buoyant during the pandemic. Not only did those government schemes and capital injections save the banks from suffering the bad debts and mortgage defaults that they’d expected. In addition, the Aussie-owned banks are also now in line to reap further profits from the Reserve Bank’s current efforts to curb the inflation that those initial Covid interventions inadvertently helped to generate. For months, the banks have been able to crank up their lending rates. They’ve also increased their profit margins. In sum, Covid has been something of a joy ride for the banks.”

All of this means that the banks are likely to have a combined profit total of $10b this year. Analysts point out that a 14 per cent rate of return is extremely high for banking, which is a low-risk activity normally expected to make more like half of that rate. Unusually, banks are making much greater profits and return on investments than the average NZX50 Index companies.

As Bernard Hickey points out, the local bank operations in New Zealand are “now more profitable than their parents and almost all their peers in other developed economies”. And according to Victoria University of Wellington’s banking analyst Martien Lubberink, the previous year’s profit announcements showed that the four big banks were making a profit of about $1,200 per New Zealander.

Actions the Government can take on banking

Four different reform areas are currently being proposed by analysts.

The first is a special tax on the current mega bank profits. A “windfall tax” has been proposed for some time, especially by those on the political left. The Greens took up this idea last month, pushing for a one-off tax on companies in super-profitable sectors such as supermarkets, electricity and banking.

Bernard Hickey advocates that Labour adopts the same tax used by the Australian government on banks, arguing today that this “would generate extra tax revenues of $2.6b a year, which would be enough to either pay for a tax cut or extra social spending, or to return the Budget to surplus sooner.” He says that the tax could be a levy of 0.06 per cent on the banks’ loans of $447b.

A second action would be to increase competition in the banking sector. At the moment the lack of competition in New Zealand means that mortgage rates are higher than they should be. Australians get a much better deal from their banks, because a more competitive market has been fostered there. Here, the four big banks are allowed to make a killing without any great attempts to make the playing field level and competitive.

One way to do this would be to invest significantly in the state-owned Kiwibank, which is currently far too small to compete properly. Some critics say that the Government is failing to properly fund the bank which means that it can’t properly compete with the Big Four Australian banks. It simply doesn’t have the assets and economies of scale to make any difference.

Sam Stubbs has argued today that the Government should scale up Kiwibank significantly: “Now the Government owns it yes it can recapitalise it. It would be profitable and the Government would still make money and you would get a serious competitor.”

Similarly, Liam Dann argues today that the best way to scale up Kiwibank would be “with mixed-model ownership in the style of the power companies – something this Government will never allow.” Dann suggests Kiwibank could be doubled in size.

The third action would be a full independent inquiry into the banking sector, as took place in Australia recently. Banking expert Claire Matthews, suggests that the Commerce Commission could also undertake a market study, as they did with the supermarkets and the building sectors. She argues that we simply don’t know how the banks currently operate and what problems there might be with the market and its regulation.

A fourth action would be to open up the banking sector by creating “open banking”, whereby customers can more freely shift between banks. This has occurred in plenty of other countries, and Labour has been accused of being far too slow to act on this.

For example, Stubbs is scathing on the lack of reform in this area: “Why aren’t they doing what everybody else has already done? They talk about open banking – they could have bought it in three or four years ago. We are still waiting for that. They could bring in number portability – we know what that has done for phones – they haven’t done that.” He suggests that the banks have successfully lobbied Labour to delay such reforms.

Liam Dann also comments on this today, explaining that “new blockchain-based tech that allows consumers to control all their banking data and switch providers more easily. In fact, New Zealand is dragging the chain on this initiative which has been adopted in the UK and opens the market to all sorts of new players to offer retail-facing banking services.”

Today, Newshub is reporting Government sources saying that “a mega shakeup” in terms of open banking is soon to be announced. While neither Labour nor the banks are commenting publicly, it’s reported that “Behind the scenes there’s now a scurry to get this out quickly to capitalise on the public outrage over the massive bank profits.”

The banking problem is going to get bigger

Although the Government seems more inclined to try and embarrass the banks into action rather than take a more interventionist or reforming approach, it won’t be enough. In fact, the political situation could get more embarrassing for the Government over the next year.

With rising interest rates bank profits are just going to get bigger. But at the same time, for homeowners these rising interest rates – together with mortgage holders going into negative equity with falling property prices – may result in defaults on mortgage payments. Banks may then have to increase their foreclosures. That’s going to reduce their social license to operate even further.

Banks would be wise to convince the public and politicians that they are “ethical capitalists”. If they can’t or won’t do that, then pressure will mount on the Labour Government to regulate. Government pleas to the banks to be kinder are unlikely to be enough to convince the public.

Increasingly voters are aware that Labour’s monetary policies of recent years led to increased super profits for the rich – including a transfer of about $1 trillion to asset owners. A reckoning might therefore be coming, and politicians will increasingly have to show which side they stand on: with the banks and the super-wealthy, or with the public.

Further reading on bank profits
Amelia Wade (Newshub): Revealed: Major shake-up to banking on its way
Tamsyn Parker (Herald): Super profits: Are banks making too much money? (paywalled)
Luke Malpass (Stuff): Jacinda Ardern bashing the banks won’t distract the public from real-world inflation
Liam Dann (Herald): The Prime Minister is right, the banks have made too much money (paywalled)
Gordon Campbell: On bank profits, and the US midterms
Sam Stubbs (Stuff): How much is too much? Just look at the banks
William Hewett (Newshub): National Party leader Christopher Luxon ‘uncomfortable’ with large profits banks are making
William Hewett (Newshub): Expert defends banks after Prime Minister Jacinda Ardern questions large profits
No Right Turn: All noise and no policy
Jamie Ensor (Newshub): No plan for study into banking profits, Grant Robertson says, despite Prime Minister Jacinda Ardern’s criticism
1News: Bank profits soar as Govt lobbied to introduce windfall tax
Tess McClure (Guardian): Jacinda Ardern says banks ‘wrong’ to take huge profits as cost of living crisis deepens
Rob Stock (Stuff): Bank of New Zealand increases annual profit by 7% to $1.4 billion
Gareth Vaughan (Interest): BNZ CEO predicts ‘more New Zealanders are going to find it tough’ as bank posts record profit
RNZ: BNZ posts record annual $1.4 billion profit

Other items of interest and importance today

RESERVE BANK
Bernard Hickey (Interest): Reserve Bank independence just ended
Peter Dunne: Labour’s meddling and National’s attacks pose serious threats to the independence of the Reserve Bank
Tom Pullar-Strecker (Stuff): Could Adrian Orr govern the Reserve Bank under a hostile National government?
Bridie Witton (Stuff): Why the Opposition is upset about the reappointment of the Reserve Bank governor Adrian Orr
Bridie Witton (Stuff): Why Adrian Orr’s RBNZ Governorship could be shortlived under a National and ACT government
Thomas Coughlan (Herald): Reserve Bank Governor Adrian Orr’s fate will be decided by election (paywalled)
Richard Harman: Luxon changes mind on Orr (paywalled)
Michael Reddell: Reappointing Orr
Molly Swift (Newshub): Economist Brad Olsen says National raises ‘legitimate concerns’ over reappointment of Reserve Bank Governor Adrian Orr without review
RNZ: Reserve Bank governor’s job: New govt needs right to make choice – Luxon
Russell Palmer (RNZ): National ‘shocked’ by reappointment of Reserve Bank Governor Adrian Orr
Ireland Hendry-Tennent (Newshub): National, ACT lambast Government over Adrian Orr’s reappointment as Reserve Bank Governor
Bernard Hickey (Interest): Opposition leader and potential Finance Minister say they’re ‘shocked and appalled’ Orr was reappointed Governor
Susan Edmunds and Bridie Witton (Stuff): National ‘shocked’ by Adrian Orr’s reappointment to head of Reserve Bank
Adam Pearse (Herald): National Party ‘appalled’ Reserve Bank Governor Adrian Orr given another five-year term
Jenny Ruth (BusinessDesk): Mixed reaction to Adrian Orr reappointment (paywalled)
David Hargreaves (Interest): Adrian Orr reappointed RBNZ Governor for five years

ECONOMY, BUSINESS, EMPLOYMENT
Adan Pearse (Herald): Cost of living burden pushes Govt into fuel sector changes
RNZ: Commerce Commission given power to set fairer petrol, diesel prices
Interest: Commerce Commission to get the power to step in and set ‘fair’ fuel prices
Geraden Cann (Stuff): ‘60% of the way to wage-price spiral and hyperinflation Armageddon,’ economist says
Pattrick Smellie (BusinessDesk): High inflation to persist for two years, says Reserve Bank (paywalled)
David Hargreaves (Interest): Up and away: RBNZ’s own survey shows inflation expectations shooting up again
Thomas Coughlan (Herald): Christopher Luxon on the fence about reviving Bridges-era tax indexation
RNZ: Productivity Commission to examine supply chain issues
Adam Stephenson (Herald): Fast-food workers deserve Fair Pay Agreements (paywalled)
Anna Whyte (Stuff): Is the pay freeze nearly over? Early public service pay offer revealed
RNZ: University staff rally at Parliament over proposed cuts

PARLIAMENT
Graham Adams (The Platform): Ardern enters the tragi-comic phase of her tenure
Glenn McConnell (Stuff): Efeso Collins considers standing for Parliament – but for which party?
Jenna Lynch (Newshub): Newshub-Reid Research poll: What New Zealanders really think of Jacinda Ardern, Christopher Luxon revealed
William Hewett (Newshub): National Party leader Christopher Luxon defends reputation after Newshub poll found Kiwis view him as ‘smarmy’, ‘inexperienced’
Brigitte Morten (NBR): Labour changes focus to election prep mode (paywalled)
Michael Neilson (Herald): Labour, National compromise on Māori electoral roll options bill in ‘rare occasion’
Newshub: Dame Jenny Shipley ‘thrilled’ Parliament now more women than men
Jamie Ensor (Newshub): Government exploring changes to proposed electoral legislation to ensure cross-party support
Joseph Los’e (Herald): David Seymour says he is not playing dog whistle or apartheid style politics – and he’s not a useless Māori
Rachel Sadler (Newshub): David Seymour denounces critics who call him a ‘useless Māori’, racist
Martyn Bradbury (Daily Blog): How the Left wins 2023 Election – Jacinda’s electorate coffee dates to maximise MMP dynamics
Kirsty Frame (RNZ): More ‘humane’ sitting hours for parliament needed, Labour and National MPs say
Nikki Mandow (Newsroom): ‘Nobody’s cracked it’ – Govt struggles to fix poor procurement

LOCAL GOVERNMENT
Georgina Campbell (Herald): Greens and Labour clean up in Wellington mayor’s committee appointments
Max Frethey (Local Democracy Reporting): Nelson mayor Nick Smith ‘disappointed’ with local government review
Steven Walton (Press): Christchurch deputy mayor Pauline Cotter keeps seat after recount confirms slim victory
Tim Murphy (Newsroom): Wayne’s first fix – a budget emergency
Verity Johnson (Stuff): We don’t need Wayne Brown to be another Office Rambo

THREE WATERS
Thomas Cramner: Three Waters and He Puapua
James Perry (Te Ao – Māori News): ‘We won’t have a say’ – iwi water representative on Wayne Brown’s counter-proposal
Bernard Orsman (Herald): ‘Outrageous’: Taxpayers foot $2.1m bill for controversial Three Waters Auckland HQ (paywalled)

ENVIRONMENT
Hamish Cardwell (RNZ): Climate Change Minister says COP ‘nightmare’ decision-making process needs to change
Marc Daalder (Newsroom): NZ promises cash for climate damage – is it enough?
Michael Neilson (Herald): COP27 climate change conference: New Zealand announces loss and damage funds of $20 million
Hamish Cardwell (RNZ): COP27: New Zealand offers $20m to developing countries for climate change damage
Olivia Wannan (Stuff): New Zealand becomes third country to offer cash to climate-hit countries
Ian Llewellyn (BusinessDesk): James Shaw heads to COP27 with a $20m promise (paywalled)
Hamish Cardwell (RNZ): Jacinda Ardern skips COP27, says commitment to climate change won’t be questioned
Richard Prebble (Herald): Jacinda Ardern misses a powerful opportunity with COP27 no-show (paywalled)
Injy Johnstone (Newsroom): Number 8 wire thinking for a Net Zero NZ
Felix Watson (RNZ): Climate change tops agenda of New Zealand insurance companies
1News: Govt’s emissions trading scheme ‘vilifies farmers’ – Luxon
Tess McClure (Guardian): Serious concerns raised in NZ about environmental impact of major productions including Amazon’s Rings of Power
Benn Bathgate (Stuff): High Court shuts down hut burning across Te Urewera

HOUSING
Damien Venuto (Herald): The Front Page: Who’s to blame for Rotorua emergency housing crisis?
Miriam Bell (Stuff): Wellington house price slide the biggest in 20 years
RNZ: Double-digit house market declines in main centres, new figures show
1News: Average house values falling by double-digit percentages

HEALTH
RNZ: Health Minister responds to mental health woes at North Shore ED
John Donne Potter ((The Conversation): With a COVID ‘variant soup’ looming, New Zealand urgently needs another round of vaccine boosters
RNZ: Government says no plans at this stage for annual Covid-19 booster for most people
Stefan Dimitrof (Te Ao – Māori News) Petition launched to halt defunding of child cancer medicines
Muriwai Hei (Te Ao – Māori News): Drug Foundation CEO on overdoses: ‘We are failing Māori’

IMMIGRATION, REFUGEES
Katie Todd (RNZ): Ukrainian arrivals say government support lacking in battle to begin new lives
Gill Bonnett (RNZ): Govt looks at Treaty interest in immigration policy
Gill Bonnett (RNZ): In residence limbo: Doctors, split families wait for news from Immigration NZ

FOREIGN AFFAIRS
Thomas Manch (Stuff): Government backs away from autonomous sanctions regime
Sam Sachdeva (Newsroom): How the US midterms will affect NZ
Gabrielle Armstrong-Scott (Stuff): Five reasons Kiwis should care about the US midterm elections

OTHER
Phil Pennington (RNZ): Officials fear anti-government sentiment could impact next census
Oliver Hartwich (Herald): Rebuilding Better: Once world-class, NZ’s education system is now a disaster. How do we fix it?
Gavin Ellis: Alarm bells must bring out disinformation fire fighters
Lloyd Burr (Today FM): Jenna Lynch, Mani Dunlop are two of the most impartial journalists I know
Thomas Manch (Stuff): Anti-money laundering regime to be tweaked after sweeping review
Riley Kennedy (BusinessDesk): No quick fix to ease anti-money laundering burden (paywalled)
Emma Hatton (Newsroom): Privacy case throws up liability questions for social media groups
Pokere Paewai (RNZ): Taonga stolen during Crown invasion of Maungapōhatu returned
Ashleigh McCaull (RNZ): New study suggests Māori settlers arrived in Aotearoa as early as 13th century

Analysis by Dr Bryce Edwards – What sort of topsy-turvy political world have we arrived at? This week, the Government continued to defend its fiscally conservative approach, in direct opposition to economists who suggest more spending is warranted. Even Treasury, the Reserve Bank, the private sector, and National appear to be open to much greater spending.

On Tuesday, Finance Minister Grant Robertson had to once again defend to economists why the Government is being so fiscally conservative – see Victoria Young’s Finance minister Grant Robertson resists calls for fiscal stimulus. Covering the Minister’s inaugural “Bloomberg address” in Auckland, this article reports: “Robertson says he will spend if necessary but for now he is resisting calls to use fiscal policy to stimulate New Zealand’s economy.”

Surely it should be the other way around. Shouldn’t a Labour Government be spending strongly on health, education, and infrastructure, with opposition coming from economists worried about debt levels and deficits? That would certainly be the normal order of things. Instead, there is a growing economic consensus about the need for Robertson and his Government to stop being so stingy and start spending on things the country urgently needs.

But as Reserve Bank Governor Adrian Orr has said, “we live in very very very interesting times”. This comment is meant in terms of fiscal and monetary conditions, yet this also applies to the political response to these conditions.

The KiwiBuild fiasco has again raised the issue of why the Government isn’t willing to invest in a mass programme of house building. The KiwiBuild reset announcement had a number of commentators arguing that the Government should be expanding house production rather than scaling back its ambitions.

Most notably, Bernard Hickey argued yesterday that the Government could have undertaken a programme to make housing affordable, but this would have cost significant amounts of money and “would have necessitated a relaxation of the debt limit” – see: Young renters just got double toasted.

This couldn’t happen, Hickey says, because “our political class are still wedded to the idea that public debt should be as close to zero as is possible”. That means KiwiBuild, or any other proper house building programme, was always going to be undercut by a lack of ambition: “The decision by the Greens and Labour to both adopt the 20 percent debt target ruled out subsidising a mass house building programme.”

Hickey has argued many times for the Government to go beyond it’s highly-restrictive Budget Responsibility Rules and start spending. For example, last month he suggested that Robertson and Ardern have spent too many hours in the studio with Mike Hosking and this has made them overly-fearful of being more than National-lite on fiscal policy – see: The building case for big and long fiscal stimulus everywhere.

Similarly, former Labour politician Bryan Gould has complained that the current Government seems too “timid” and “foolish” to embark on the necessary state building programmes to meet New Zealand’s needs: “Many other countries around the world have followed this insight – not least, today, Japan and China – but, at various other times, countries like the pre-war United States re-arming under Franklin Roosevelt, and depression-ridden New Zealand under Michael Joseph Savage, when we built thousands of state houses and brought the Great Depression to an end in the 1930s” – see: More courage needed.

Gould says Robertson is failing to do the right and smart thing because he’s allowing National to set the political agenda: “It makes no sense for the government to be reluctant to borrow, when it can do so at virtually no cost, and could thereby provide a shot in the arm for a slowing economy – as well as proceeding with economically beneficial infrastructure projects.  Sadly, Labour governments have often been unwilling to borrow when it would make sense to do so, for fear of being accused of profligacy, but this is to allow their opponents to set the agenda.”

And writing today, the boss of KiwiSaver company Simplicity, Sam Stubbs, says Government spending on infrastructure is urgent, and “In my 40 years of investing I’ve never seen such an opportunity. Why? Because demand, supply and price are in a rare and very close alignment. The demand for major infrastructure is clear, with many projects nationally and locally needing serious funding” – see: Government debt is low and borrowing is cheap; time to think very big.

Stubbs calls out the Government’s lack of action at a time when borrowing is so cheap and debt is so low: “fiscal restraint when interest rates are this low simply isn’t a rational way to manage any balance sheet, let alone a whole economy.” The Government’s reluctance to spend the necessary money just isn’t logical: “It’s looking increasingly like the Government is still wanting to save money for a rainy day, when its already raining. We need to build bridges over troubled waters in the short term, and we need them anyway. The case for investing heavily in infrastructure, using local money, is now compelling.”

Another private sector investor, Mark Fowler, writes in the Herald today that “the Government’s reluctance to spend” doesn’t make sense, and by building infrastructure they would be creating jobs, economic growth and valuable assets for the nation – see: Why are politicians so averse to investing for the future? (paywalled). He says Labour and National need to be listening more to the Reserve Bank, which is currently encouraging borrowing and spending.

Similarly, today TOP leader Geoff Simmons writes about the unsuccessful KiwiBuild reset, and argues that central government should be stepping in to fund the infrastructure necessary for massive new housing, and that this would be an “opportunity for the Government to finally be bold and transformative” – see: KiwiBuild reset shows Labour have completed their transition into National Lite.

The reluctance of politicians to deal properly with the “public infrastructure deficit” is also lamented by Pattrick Smellie, who says “our two main parties of government, National and Labour, are locked in a mindless contest to be the least willing to let the boat out on government debt” – see: Bone-headed debt debate ahead (paywalled).

Smellie points to Reserve Bank Governor Adrian Orr recently making “an unusually frank plea for the government to use its balance sheet strength” by spending more, and he says Orr’s request should be heeded. He argues that the “low-debt mantra” of the Finance Minister and others is harmful and unintelligent.

Although some more conservative economists are unconvinced about the need for a big spend-up, even former Reserve Bank economist Michael Reddell acknowledges that a good case can be made for more spending – see his blog post, Fiscal policy. He points out that by historical comparison, the current government is rather rightwing in its low level of expenditure.

What’s particularly interesting is Reddell’s calculations that the Labour-led Government are effectively spending less on health and education than National was under Bill English. Here’s his main point: “Education spending this year was last this low in 1988.  Health spending has increased a little, but the share of GDP spent this year is lower than in all but the last two years of the previous National government.  And this in a sector where the ageing population – and, arguably, advances in technology – could probably make a case for a rising share of government spending in GDP.  At least if you were a party making the sorts of arguments Labour was making at the last election. There is something about their fiscal choices that – based on their professed values and rhetoric – doesn’t make a lot of sense to me”.

Nonetheless, the paradigm is changing fast, with everyone coming around to the need for increased government spending. This even includes the National Party. As Jenée Tibshraeny details, under finance spokesperson Paul Goldsmith National seems to be becoming much more fiscally liberal – see: National no longer sees need for government debt-to-GDP ratio to fall.

National is even relatively happy with the Government’s current levels of spending, with Goldsmith saying: “We think the figure at the moment is about right”. Furthermore, he says “if there are good opportunities to spend money on infrastructure, we’re open for that.”

This has been reinforced by a recent opinion piece by former National Finance Minister Steven Joyce, who has made the case for more spending. He’s outlined how at the time of the global financial crisis, his government spent more despite its declining income, and he argues it’s time for such an increase again – see: Here’s why the Government needs to spend more now.

Joyce says: “It makes sense in a slowing economy to bring forward infrastructure investment to boost economic activity and protect jobs. You get the economic boost from the extra spend, plus something to show for it. If you build the right infrastructure it can in turn boost economic growth in the future. Governments build things like hospitals, schools, prisons, electricity transmission lines, and new roads and railway tracks.”

Of course, National’s favoured target for infrastructure spending is on transport and roading, and Joyce claims the current Government are making disastrous cutbacks in this area.

With the clamour to spend more, there will now be a whole new debate on where this should occur. This topic is well covered by Liam Dann in his column, Get set for the most stimulating NZ election in a generation (paywalled). In this, he outlines how the ideological traditions of Labour and National will result in different areas for generosity at the next election. Beyond infrastructure spending – which both parties may end up agreeing on – it’s likely to be a question of more welfare spending (Labour) or tax cuts (National).

Regardless, Dann says to expect a new focus on spending over the next year: “Brace yourself, New Zealand. You’re about to get fiscally stimulated. With the Reserve Bank Governor, economists and business groups calling for the Government to inject more fuel into our slowing economic engine, the 2020 election is shaping up to be the most generous campaign in years. The time for austerity has passed. Politicians across the ideological spectrum have been given the green light to loosen the shackles on the Treasury vaults.”

For another very interesting discussion of these issues, see Thomas Coughlan’s National and Labour on the same page on debt. He points to National’s recent loosening of fiscal policy as being highly significant: “The concession was massive. If National wins power in 2020 and sets its debt limit for the rest of term, it would mean an increase of $36 billion over the 10 per cent target set by the previous National government’s finance minister, Steven Joyce.”

The topsy-turvy aspect of the situation could even play out further, Coughlan says, with National willing to set spending/debt targets higher than Labour: “If National really wanted to do something for the economy, it would set a public debt target above Labour’s. Such a target would probably align quite closely with where the business community would like to see public debt.”

And, if that seems odd, Coughlan also points out that it’s Treasury – alongside the Reserve Bank – that is currently signaling the need for, or possibility of, much higher government spending: “Even Treasury – that famously hawkish Government ministry – said net debt could rise to roughly 30 per cent of GDP and still leave headroom for a crisis like an earthquake or a recession. The case for borrowing has never been greater.”

Much of the debate about greater government spending relates to the possible use of an aggressive injection of money into the economy by Government if some sort of sharp recession struck. The common term for this is “helicopter money” – which is well explained by Thomas Coughlan: “Helicopter money is the nickname for stimulating the economy by putting money in peoples’ accounts, as if you had thrown it out of a helicopter” – see: Give Kiwis ‘helicopter money’ cash payouts if economy crashes – Treasury.

For similarly useful discussions of this, see Bernard Hickey’s What if money really did fall from the sky?, and Marc Daalder’s RBNZ eyes unconventional options.

Finally, on the topic of the Government’s spending on housing and KiwiBuild, see my updated blog post, Cartoons about Labour’s KiwiBuild and the housing crisis.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

OP-ED by Shamshad Akhtar

Asia and the Pacific remains the engine of the global economy. It continues to power trade, investment and jobs the world over. Two thirds of the region’s economies grew faster in 2017 than the previous year and the trend is expected to continue in 2018. The region’s challenge is now to ensure this growth is robust, sustainable and mobilised to provide more financing for development. It is certainly an opportunity to accelerate progress towards achieving the 2030 Agenda for Sustainable Development.

Recent figures estimate economic growth across the region at 5.8 per cent in 2017 compared with 5.4 per cent in 2016. This reflects growing dynamism amid relatively favourable global economic conditions, underpinned by a revival of demand and steady inflation. Robust domestic consumption and recovering investment and trade all contributed to the 2017 growth trajectory and underpin a stable outlook.

Risks and challenges nevertheless remain. Rising private and corporate debt, particularly in China and countries in South-East Asia, low or declining foreign exchange reserves in a few South Asian economies, and trends in oil prices are among the chief concerns.  Policy simulation for 18 countries suggests a $10 rise in the price of oil per barrel could dampen GDP growth by 0.14 to 0.4 per cent, widen external current account deficits by 0.5-to 1.0 percentage points and build inflationary pressures in oil-importing economies. Oil exporters, however, would see a positive impact.

These challenges come against the backdrop of looming trade protectionism.  Inward-looking trade policies will create uncertainty and would entail widespread risks to region’s export and their backbone industries and labour markets. While prospects for the least developed countries in the region are close to 7 per cent, concerns persist given their inherent vulnerabilities to terms-of-trade shocks or exposure to natural disasters.

The key questions are how we can collectively take advantage of the solid pace of economic expansion to facilitate and improve the long-term prospects of economies and mobilize finance for development as well as whether multilateral institutions, such as the World Trade Organization membership can resolve the global gridlock on international trade?

Economic and financial stability along with liberal trade access to international markets will be critical for effective pursuit of the 2030 Agenda.  Regional economies, whose tax potential remains untapped, now need to lift domestic resource mobilization and prudently manage fiscal affairs.  Unleashing their financial resource potential need to be accompanied by renewed efforts to leverage private capital and deploy innovative financing mechanisms. The investment requirements to make economies resilient, inclusive and sustainable are sizeable − as high as $2.5 trillion per year on average for all developing countries worldwide.  In the Asia-Pacific region, investment requirements are also substantial but so are potential resources. The combined value of international reserves, market capitalization of listed companies and assets held by financial institutions, insurance companies and various funds is estimated at some $56 trillion. Effectively channelling these resources to finance sustainable development is a key challenge for the region.

The need to come up with supplementary financial resources will remain. Public finances are frequently undermined by a narrow tax base, distorted taxation structures, weak tax administrations, and ineffective public expenditure management. This has created problems of balanced fiscalization of sustainable development, even if the national planning organizations have embraced and integrated sustainable development agenda in their forward looking plans.

Despite a vibrant business sector, the lack of enabling policies, legal and regulatory frameworks, and large informal sectors, have deterred sustainability and its appropriate financing. The external assistance from which some countries benefit is insufficient to meet sustainable development investment requirements, a problem often compounded by low inbound foreign direct investment. Capital markets in many countries are underdeveloped and bond markets are still in their infancy. Fiscal pre-emption of banking resources is quite common. For those emerging countries which have successfully tapped international capital markets, a tightening of global financial conditions means borrowing costs are on the rise.

Our ESCAP flagship report, Economic and Social Survey of Asia and the Pacific 2018 (Survey 2018) which has been launched today calls for stronger political will and governments strengthening tax administrations and expanding the tax base. If the quality of the tax policy and administrations in Asia-Pacific economies matches developed economies, the incremental revenue impact could be as high as 3 to 4 per cent of GDP in major economies such as China, India and Indonesia and steeper in developing countries. Broadening the tax base by rationalizing tax incentives for foreign direct investment and introducing a carbon tax could generate almost $60 billion in additional tax revenue per year.

But government action must be complemented by the private sector to effectively pursue sustainable development. The right policy environment could encourage private investment by institutional investors in long-term infrastructure projects. Structural reforms should focus on developing enabling policy environment and institutional setting designed to facilitate public-private partnerships, stable macroeconomic conditions, relatively developed financial markets, and responsive legal and regulatory frameworks.

Finally, while much of the success in mobilizing development finance will depend on the design of national policies, regional cooperation is vital. Coordinated policy actions are needed to reduce tax incentives for foreign direct investment and to introduce a carbon tax. For many least developed countries, the role of external sources of finance remains critical. In many cases, the success of resource mobilization strategies in one country is conditional on closer regional cooperation.   ESCAP’s remains engaged and its analysis can support the planning and cooperation needed to effectively mobilize finance for sustained, inclusive and sustainable economic growth.

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Shamshad Akhtar is the Under-Secretary-General of the United Nations and Executive Secretary of Economic and Social Commission for Asia and the Pacific (ESCAP)

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

This week we take a look at the dual long-term challenges facing farming – protein alternatives and environmentalism.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz