After the termination of Qorvis Communications and Vatis, Prime Minister Sitiveni Rabuka has indicated that attention has now shifted to the state-run Fiji Broadcasting Corporation (FBC) and Fiji Sun newspaper.

He revealed this while addressing the nation on Friday afternoon.

“We made it clear in our manifestos that implementation of certain promises would be dependent on the true state of Fiji’s economy,” Rabuka said.

“We will be conducting mandatory audits and associated checks and balances. Until these are completed, we will be curtailing what we consider to be wasteful spending in areas that are not a priority.

“We’ve started an investigation into what appears to be excessive spending in the Department of Information, through payments to the [US-based] public affairs company Qorvis, the local communications company Vatis, the Fijian Broadcasting Corporation (FBC) and the Fiji Sun newspaper.

“In fact, there are many looming issues to address.”

He said that in the past 14 days they had made progress with ministers establishing themselves in their respective ministries.

Questions sent to FBC chief executive officer, Riyaz Sayed-Khaiyum, and Fiji Sun acting chief executive officer Rosi Doviverata remained unanswered when this edition of the Fiji Times went to press.

Wata Shaw is a Fiji Times reporter. Republished with permission.

Article by AsiaPacificReport.nz

New National Party leader Todd Muller has presented his party’s vision for New Zealand as it grapples with the economic cost of the Covid-19 pandemic. But Muller’s vision was unsurprisingly National while surprisingly short on economic detail. And, after a week where sordid privacy breaches plagued the party – leaving Muller exposed and scrambling to convince voters that National is credible, stable, honourable and ready to govern – Muller’s campaign vision was supposed to be a circuit-breaker. Instead, it left more questions than answers.

Last week private details of recently returned New Zealanders were leaked to a select grouping of media. The privacy breach was seen as the latest bungle by those charged with protecting New Zealanders against the Covid-19 virus.

National’s leader Muller was quick to apply election year politics to the breach and claim it as another example why voters should oust the Labour-led Government and vote for his National Party at the September elections.

But by Tuesday we learnt things were not as they seemed. After the Government had ordered a judicial inquiry into the matter, stating that the breach could potentially be deemed a criminal issue, a lone National MP put his hand up and admitted to have been the person who sent the private information to the media.

But how did the information come to be in MP Hamish Walker’s possession – information that named Kiwis who were in quarantine, detailed their health status, and indicated the location of their place of isolation?

At that point, National’s Machiavellian politics turned a shade dirty.

It was revealed, Walker was sent the private information from former National Party president Michelle Boag (who was also heading the deputy leader’s re-election campaign team). Boag had apparently received the information as acting manager of a prominent rescue helicopter entity, but, according to Boag, it was received via her personal email account.

By Wednesday, Boag had resigned her acting manager’s role and stood down from the deputy leader’s election campaign team.

Muller insists he knew nothing of Walker and Boag’s tactics and moved to stand his MP down stripping him of his portfolios and hinting that he should be jettisoned from the party referring the matter to the National Party’s board (the board however decided only to remove Walker as a candidate at the next election).

UPDATE: By Friday (July 10, 2020), It was revealed Boag had also provided National MP and health spokesperson, Michael Woodhouse, with private health details of patients. Woodhouse insists that ‘he deleted the information and did not pass any information on to others. He confirmed the information given to him by Boag was not the source of allegations regarding [what was reported as] lax security measures at the New Zealand border‘. (Stuff.co.nz, July 10, 2020)

Stuff reported: ‘Boag said she had sent “several” emails to Woodhouse in June. She described the emails as “comprising notification of a small number of then new Covid19 cases”‘.

Michelle Boag has now resigned her National Party membership.

Woodhouse said Friday he would cooperate fully with the judicial inquiry into the privacy breaches, led by Michael Heron QC.

But Woodhouse is not without blemish either. Earlier this week he told media the leak of patients’ health details was “another serious failing” of the Labour-led Government.

Woodhouse said: “Reports coming in this morning of personal details being leaked which reveals the identity of New Zealand’s current active cases, is yet another serious failing from this incompetent Government.“

“This is unconscionable and unacceptable that those suffering from the incredibly dangerous virus now have to suffer further with their private details being leaked.“

Woodhouse went on to say: “… it’s unfathomable that it couldn’t handle a simple task like this.“

It is ‘unfathomable’ why Woodhouse did not come clean with the knowledge that he himself had received private information of patients’ health details from Michelle Boag.

Woodhouse’s reputation now risks being in tatters. He needs to explain himself further.

What is potentially more damaging are New Zealand Herald revelations that leader Todd Muller knew Woodhouse had received patients’ private health information from Michaelle Boag. This, the Herald reported, Muller knew on Tuesday evening (July 7, 2020).

NZ Herald: A party spokeswoman said today Woodhouse told Muller this on Tuesday night.

‘Muller was specifically asked by reporters “have you checked with Woodhouse, specifically, whether he received that same information from Boag”. “No,” replied Muller and a reporter asked “why not?”

“It’s very clear from our perspective there’s a conversation that’s occurred between Michelle Boag and Hamish Walker. We are confident from what we can see that the issue here relates to Michelle Boag and Hamish Walker.”‘

‘Asked again if he had spoken to Woodhouse and if Boag was a Woodhouse source, Muller said: “No, I don’t really understand where you’re going with this.‘

‘The spokeswoman said Muller didn’t say something yesterday because “we had to look at what that information was and the nature”.

“We needed to assess the information.”‘

The whole deceitful saga leaves one with a sense that National remains bereft of a moral compass, indifferent to legal rights to privacy, manipulative of the public discourse, and prepared to manufacture scandal so as to advance its ambition to retake the Treasury Benches in 2020.

This week’s revelations expose National to a reality that Machiavellianism remains, that factions within National are prepared to operate from the shadows, that the end game justifies the means – to win at all costs.

It is reasonable to realise that Todd Muller was, at best, not respected, at worst, considered irrelevant.

But if Only It Was An Isolated Incident

With Todd Muller becoming leader, standing alongside his Deputy Nikki Kaye, many political observers considered National was sincere in removing dirty politics tactics from its 2020 election toolkit.

But since Todd Muller became leader of the National Party we have seen:

• National’s new leadership team signal its MPs to go for it… that National has a moral obligation to win.
• a culture of ‘politics placed before the public’s interest’ … gotcha politics designed to erode a public’s confidence in National’s opponents, placed ahead of serving the public interest.

Let’s look at a brief recap of previous happenings:

• Around July 17, For at least 20 hours, National held on to information that two women who were Covid positive had travelled from Auckland to Wellington
• National chose to wait so they could use that knowledge in Parliament and deliver a political hit rather than alert health officials, the Government, and the media
• The public’s right to know that information was denied them, for a time.

Clearly, the public deserved to know immediately so those who may have been in contact with the contagious women could self isolate and await to be tested.

But there’s more.

Also we have seen leaks from inside the National Party revealing how its private polling found it had been sinking in popularity after experiencing a short rise since Muller took the leadership. Its leader Todd Muller was disappointed in the leak having occurred. The leak indicates a lack of discipline inside National.

Is this an indisciplined party that is lacking in leadership, out of step with the New Zealand public’s expectations and interests? This whole saga raises the question: Is National fit to govern in 2020?

A Circuit-Breaker – A Vision – But Where’s The Plan?

After the revelations, and after National’s board failed to remove Hamish Walker from the party, Todd Muller needed a circuit-breaker to restore an impression of leadership. National’s Plan to get New Zealand working ought to have provided Muller with exactly that.

At the Christchurch Chamber of Commerce, on Thursday, Todd Muller indicated his Plan had five key pillars:

• Responsible Economic Management
• Delivering Infrastructure
• Reskilling and Retraining our Workforce
• A Greener, Smarter Future
• Building Stronger Communities.

But beyond that, Muller gave little else away. He promised that “over the coming months, and into August, I will be releasing the lion’s share of our Plan in a series of major speeches and engagements.”

He added: “Our vision, our Plan and our direction for New Zealand will place jobs at the centre and deliver the results Kiwis need. We have a track-record that shows we do as we say and get the job done.”

He continued: “Over the next 72 days my team and I will be working hard to share our Plan with you.”

He said: “National believes in: An open and competitive economy;
A broad-based, low-rate tax system; An independent central bank with the primary goal of price stability; The Fiscal Responsibility Act, now part of the Public Finance Act; and A flexible labour market, underpinned since 2000 by good faith.”

Then came a glimpse of the real plan. Muller said: “Under Helen Clark, John Key, Bill English and Jacinda Ardern, New Zealand has spent, in 2020 dollars, $505 billion on social welfare, $302 billion on health, $260 billion on education, and $27 billion on corrections. That is well over a trillion dollars on those four areas alone just since the year 2000, or well over $200,000 for every single person living in New Zealand today.

“When we see more than one in eight New Zealand children still living in material hardship; more than 310,000 Kiwis on a benefit even before Covid-19 (and now up to more than 350,000); more than a million food grants needed last year; and the state house waiting list having more than tripled since Labour was elected, then I don’t think anyone can believe we have achieved the best possible return on that trillion-dollar-plus investment.”

So what is Todd Muller suggesting here? Are we to believe that under his leadership National would embark on an austerity plan that would abandon community-led social investment, education, tertiary and trades-training investment (a raw point of failed social investment of former prime minister John Key’s so called ‘rock star economy’ that was publicly criticised by the OECD)?

Is Todd Muller suggesting a return to small government ideology akin to last century? If so, is that out of step with globalised and developed western economies that have embarked on fiscal stimulus plans more aligned with Keynesian economics than that of Milton Friedman and George Stigler’s Chicago school of economics theories that New Zealand zealously embraced from 1987 through to 2017?

Surely in the post-Covid recovery period economies will require governments to intervene, to commit to broad-based and bold fiscal stimulus, plans that lead toward a rebalancing between export-led recovery and domestic self sufficiency and societal progress?

Is there a role for business to work with government? Yes, certainly, it is a necessity. But in the immediate post-Covid recovery period the business sector will not be ready to pick up the shovel and rebuild to scale on behalf of a government that does not have the willpower to lead the effort.

Muller said on Thursday: “Let me tell you what that means in practice. In 2020/21 and 2021/22, my Government will not be scared of investing more in retraining, if we are confident it will genuinely improve productivity, lower unemployment, increase the tax take, reduce the cost of welfare and improve wellbeing over the following decade.”

Does this mean we would see an overhaul within a period of crisis where Government would constrain stimulus through targeted ‘investment’ to the private sector, relying on the latter to deliver once-government services and social programmes?

Will Todd Muller’s National Party outsource to the private sector its responsibility to deliver social welfare, health, education, corrections services?

Is this what Todd Muller’s key appointment, Matthew Hooton, has been working on since his appointment last month? Hooton’s political commentary is known to many and has contributed greatly to political discourse in New Zealand. Matthew Hooton is known as a proponent of small government, an advocate for the ideologies of right neo-liberal economics who earned his National Party stripes when the ideas of former minister of finance Ruth Richardson was all the rage. Hooton often criticised John Key and former finance minister Bill English for being too moderate and failing to deliver, while popular, reform that would further liberalise New Zealand economic environment.

If Todd Muller is to be regarded as a prime minister in waiting, then eliminating dirty politics from his party is only part of a necessary plan. Convincing a voting public that user-pays and the privatisation of essential social services – welfare, health, education, and corrections – may be truly testing.

But then, a real leader would demonstrate courage alongside convictions. And time, as they say, is not on his side.

Good or Bad?

Are there good or bad signature patterns for countries. The most obvious answer is that every country should ideally look like Portugal in 2019. Government sector and foreign sector balances would be close to zero. Private sector balances would also be close to zero, with household surpluses (net household saving) offset by business deficits (borrowing and investment spending). We cannot be sure that the private sector was actually like that in 2019; in the years before the global financial crisis there was actually a common pattern in some countries of business saving offset by substantial extensions to household debt.

In reality, the perfect signature combination for a growing economy is closest to those of Portugal in 1989 or 1992: private surpluses at about four percent of gross domestic product (GDP), with government deficits also about four percent of GDP. Further, while foreign balances are ideally about zero, foreign surpluses of upto five percent of GDP are not necessarily a problem.

In normal years in most of our lifetimes, GDP has grown by about five percent a year – three percentage points on average due to economic growth and two percentage points on average due to inflation. So signature imbalances that are within five percent should not be seen as a problem.

What is interesting from these charts is to see what is the historical norm for a country, and then to see departures from that norm as an important economic story for that country, and maybe for the world economy as a whole. Major world events should show up in all capitalist economies’ charts, as deviations from their normal financial signatures. For example, the Covid19 pandemic will show up as a significant government deficit event for all countries, regardless of what came before.

For Portugal we can see that government deficits and private surpluses are normal, but that a big change occurred from the late 1990s to the early 2010s

Early 1980s

Before 1985, for both countries there is no IMF data available for government deficits that was collected on the same basis as post-1985 data. But we do know that the early 1980s were years of very high oil prices, though ameliorated each year from 1982 by general inflation exceeding oil inflation. (The early 1980s was also a time in which, in most countries, interest rates were lower than inflation; meaning negative effective interest rates.)

Large foreign sector surpluses were normal for all oil-importing countries in the early 1980s. This meant that oil-exporting countries were lending heavily to oil-importing countries; that is, much oil was being purchased ‘on credit’ and not being paid for by commensurate imports.

In New Zealand we know of this time as the ‘late-Muldoon period’. The purple columns represent New Zealand domestic balances – private and government combined into one. We know enough about that time in New Zealand to be sure that, if we had the full information, the purple would have been essentially red.

For Portugal that is also almost certainly true until 1983 (and for the same reasons as in New Zealand), with 1984 being much like 2012 and 1985 looking more like 2013; ie blue above the zero line and plenty of red below it.

The 1990s

New Zealand’s crisis of the 1987 to 1992 period is understated by the chart. It is most evidenced by the few years of private sector surpluses; unusual for New Zealand though normal for most countries.

Portugal shows signs of a financial crisis in 1985 and 1986; after that, until 1996, it looks like a picture of normality. New Zealand moved to its new normal in 1993. Indeed Portugal joined the European Union in 1986, so it was a period of uncertainty that soon eased. In 1996 Portugal had a change of government, and took major steps towards fuller integration into the European Union; and integration that would see Portugal as an enthusiastic adopter of the Euro currency in 1999.

So, what was happening in Portugal from 1996 was a substantial inflow of ‘investment’ mainly from the richer northern European Union countries. We see that this intra-EU investment is partly supporting government spending in Portugal, and partly supporting private spending.

The 2000s and 2010s

This was a period in which Portugal’s private sector emulated New Zealand’s, but without having a floating currency. New Zealand always had the ability to rebalance through a substantial adjustment to its currency, as indeed occurred in the global financial crisis of 2008-09. Further, much of the ‘offshore funding’ to New Zealand’s private sector was conducted in New Zealand dollars, so a fall in the New Zealand dollar would not create an aggravated crisis of foreign debt. New Zealand had found a way to live with private sector deficits as its norm. Few countries have ever been able to do that.

In the 2000s, Portugal experienced about three percent inflation every year, about the norm for any advanced capitalist country. The problem was that it was part of a fixed currency zone in which the dominant country – Germany – had annual inflation rates of under two percent. (So, the easiest way to read the green in Portugal’s chart is to think ‘Germany’.)

Portugal’s economy was becoming mortgaged to, in particular, Germany’s private sector. The forces bringing this about were coming mainly from Germany; Germany’s savers were seeing Portugal as an excellent ‘investment opportunity’. Portugal could not really stop this, even if it had wanted to.

As the 2000s progressed, Portugal’s ‘real exchange rate’ increased relative to Germany’s. This situation meant that economic resources in Portugal shifted towards its non-tradable sectors (most services, and construction) whereas economic resources in Germany shifted towards its tradable sectors (especially manufacturing and tradable services). So, it meant Portugal kept importing more from Germany, and exporting less to Germany, making Portugal’s private and public sectors evermore indebted to German investors.

This situation put Portugal into deflation in 2009 and 2014, and recession from 2009 to 2014.

After that, Portugal returned to its normal signature pattern of balances. Then, from 2018, near zero inflation, slow growth and Eurozone policy seem have modified that norm, creating less willingness from government to run deficit balances.

In the meantime, New Zealand remains a darling of the foreign creditor community, with that community happy to keep enabling substantial private sector deficit spending. That community is safe in the knowledge that New Zealand poses few risks, even when New Zealand makes economic and political reforms.

2020-21

All countries will show government financial deficits in 2020 and most likely 2021. Economic crises always lead to private sector surpluses. So, both Portugal and New Zealand will show blue balances much higher than usual, and red balances much more negative than usual. Because Portugal’s normal private balance is higher than New Zealand’s, so will its Covid19 private balance be higher than New Zealand’s. And because Portugal’s normal government deficit is bigger than New Zealand’s, then Portugal’s Covid19 government deficit will be bigger than New Zealand’s. Further, although Portugal has managed Covid19 better than most of the Eurozone countries, it has still a much greater pandemic problem than New Zealand. Portugal can expect balances like 1987 or 2014 for a few years. New Zealand may have a year with a balance like 1991, then a year with a balance like 1988, and then maybe a few years like 2015.

Both Portugal’s and New Zealand’s economies have similar-sized economies, though Portugal’s GDP is less per person. The countries have very different histories, though both are renowned for their maritime trade. Portugal will continue to have to fall into line with European Union norms. New Zealand will continue to have the freedom to follow its own path, and with the benefit of a more vibrant Asia to trade with.

On Project Syndicate – and in other places in recent months – orthodox US economist Kenneth Rogoff has presented the case for deeply negative interest rates. Another financial sacred cow falls; yes, interest rates can be negative, even substantially negative. It can take a while, though, for shot sacred cows to die. Keynes, in the 1930s, mortally wounded the ‘balanced budget’ bovine. And the experiences of Japan in the 1990s, and the United States in the Second Gulf War (when taxes were cut), dealt to the hallowed cow of ‘fiscal responsibility’. Yet those ghostly cattle-beasts still stalk the minds of politicians, bureaucrats, and journalists.

Interest as a Yield

Interest is a mystery to most of us. It’s actually two conceptually distinct – though related – things. Interest in nature is better referred to as ‘yield’. We may think of a herd of beef cattle. The gross yield is essentially the calves, with the net yield being the beef and leather produced, subject to the constraint that the herd is maintained over time at its usual size.

Thus, the concept of ‘yield’ is similar to the concept of ‘profit’. In a bad year for the farm, there may be a loss, for example because a natural disaster led to the death of all the calves. In that sense, the yield – or interest on capital – can be negative. Further, with this concept of interest, negative interest is unequivocally a bad thing, and the higher the interest (ie yield) the better.

When I was a boy, we had school ‘banking’, a basic saving account using the symbol of a squirrel, supposedly a creature that saves (nuts) due to an instinct of thrift. We received interest on our school savings, something those squirrels never did on their savings. The squirrels’ yields on their hoards of nuts are always negative; some of those nuts go missing or deteriorate. (For squirrels to gain a positive yield, they would have to plant most of their nuts, then wait until the new crop of nuts could be harvested.)

I also remember my mother explaining to me the difference between a ‘savings bank’ (such as the Post Office Savings Bank) and a ‘bank’ (such as the Bank of New Zealand). She said that interest was a ‘reward’ for saving money. And she said that money held in a bank account did not earn interest; actually, customers paid fees to hold their money there. But, she said, they could draw on their ‘money in the bank’ by writing cheques to other people. So I understood the ‘principle of convenience’. I cannot say that I really understood the reason for the ‘reward’, though. It was in another, later, conversation with my mother that I learned about lending; and it bothered me then – as it bothers many – to think that, if I had money in the bank, then somebody else might be spending it; hence a reward was justified. I eventually understood banking; indeed, in the days before banks became financial supermarkets. I had to study economics academically, however, before I had any real inkling about where money comes from.

My generation – and other generations –  grew up to learn that interest is natural, and always positive. And we learned that the secret to wealth was restraint and compound interest. Thus, we came to see indefinite economic growth in the same way, as a process of accumulation rather than circulation. The idea that squirrels saving nuts indefinitely would become wealthy was always an illusion; likewise, economic growth as a process akin to compound interest was always an illusion.

I learned – when an adult, through financial economics – that interest can be a ‘price’, as well as a ‘yield’. (In fact, interest is two prices. One of these is the price of ‘risk’. Different borrowers have different risk profiles. Higher risk borrowers pay a higher price to borrow money. I am not particularly concerned here, however, about that price which is commonly called ‘risk premium’.) Interest is a price, that if set correctly, regulates economic life; it can facilitate growth when growth is needed, and facilitate slowth when slowth is needed. Very low interest rates penalise the pointless accumulation of money, and facilitate the circulation of money.

Interest as a Market Price

If we can imagine interest rates being three percent (as they usually were when I was a boy), and, the amount of money lenders wanted to lend being the same as the amount of money that borrowers wanted to borrow, then the ‘price of loanable funds’ would be three percent, and that market would be balanced.

If there was a shift in this ‘loanable funds’ market, with say more people wanting to borrow, then excess demand for loanable funds would require the interest rate to increase. Following that price increase, this market would establish a new balance.

What if there was a change in circumstances (other than a rise in interest rates) that caused fewer people to want to borrow money. Or caused people to repay loans more quickly? Or more people to want to lend money? Or people wanting to be repaid more slowly? Or more people wanting to relend money that has been repaid?

These situations would induce a fall in interest rates. And there is no necessary reason why that price fall should stop at zero.

However, if banks could lend money to the Reserve Bank and get one percent interest, they are unlikely to lend to anyone else unless the banks charge an interest rate above one percent. So, for the market to balance properly, the interest rate set by the Reserve Bank should reflect underlying conditions in the loanable funds market.

If underlying conditions require that the Reserve Bank set a negative ‘Official Cash Rate’, then so it should. It would mean that the Reserve Bank’s large wholesale customers – the banks and the central government – would be paid to borrow from the Reserve Bank.

Obviously, if borrowing from the Reserve Bank increased too quickly in response, the Reserve Bank would have to reset the rate back to positive or zero. But what if these customers were not sufficiently induced to borrow more by negative interest rates, then the Reserve Bank would have to ‘go more negative’; interest rates would keep dropping until balance is established in the loanable funds market.

If the interest rate (price) is set too high, there will be too little borrowing and spending, and many frustrated lenders. The result may be an economic recession. If the interest rate (price) is set too low, there will be too much borrowing and spending, and not enough people wanting to lend. The result may be some inflation.

It is worth noting that some economists in New Zealand – Eric Crampton (of the New Zealand Initiative) for one – favour negative interest rates (pure expansionary monetary policy) over an expansionary fiscal policy where governments borrow (and spend) enough to allow the interest rate to stay positive. This is the view generally favoured by economic liberals; economists and others who are sceptical of governments having too large a presence in the market economy. This scepticism is based partly on a general distrust of large government, and partly on a disbelief in the competence to bureaucrats to make the best spending decisions. Economic liberals generally see private spending as more efficient, at the margin, than government spending. (‘At the margin’ means considering ‘extra spending’ rather than ‘total spending’.)

Certainly, if governments fail to take on enough new debt this year, the case for negative interest rates will strengthen. And the case for deeply negative interest rates in countries more affected by Covid19 than New Zealand will be strong if governments in those countries run insufficiently large budget deficits.

Negative interest rates in the past

Except for the recent cases of Sweden, Denmark, Switzerland and Japan, I know of no historical cases of negative nominal interest rates. But negative real interest rates have been quite common. The last time we had substantial negative real interest rates in New Zealand was from the late 1960s to the early 1980s. Then, inflation rates were higher than interest rates, so saved money would buy less in the future than in the present. And repaid money could buy fewer goods and services than the money could have bought if it had been spent instead of lent.

While the capitalist world did not fall apart in the 1970s, many people felt that they were entitled to positive interest rates, without ever being able to say why. And those people instigated a revolution, called neoliberalism.

In today’s world, without inflation, negative real interest rates also mean negative nominal rates. (An interesting case, however, is Switzerland, which for a while had negative inflation and less negative interest rates, meaning that real interest rates were not negative.) Thus (unlike in the 1970s), the quoted (or ‘headline’) interest rates – at least in wholesale financial markets – would have to be negative. This is what makes some people very uneasy.

In my chart analysis of Sweden and Australia, I noted that there was a particular reason why Sweden, Denmark and Switzerland had to have negative interest rates. In order for these countries to have similar trade surpluses as their comparable countries inside the Eurozone (Germany, Netherlands and Austria), they had to avoid appreciations of their currencies. That meant they needed interest rates lower than in the Eurozone; and the Eurozone had a core wholesale rate of zero.

The Swiss Franc has been stable against the also-strong United States dollar since 2014. Many people prefer to hold money in Swiss Banks despite the negative interest they ‘receive’; to these people, it’s like paying a fee to keep their money in the best place for them; not unlike the situation my mother told me about in relation to banks in the 1960s.

Deeply Negative Interest Rates

It may well be necessary for interest rates in some countries to go deeply negative. That will mean negative retail interest rates (term deposits), and negative mortgage rates.

Imagine deposit rates and mortgage rates set at, say, minus two percent.

The situation would not be fundamentally different from that of the 1970s, when the incentive was to borrow and spend rather than to save and lend. But, the obvious new problem is that people will want to drain their interest-bearing bank accounts, as stashes of cash, and then bury this cash under the bed, or some such place.

Fortunately, the world now has an infrastructure for cashless transactions. It would not be necessary to ban cash – notes and coins – entirely, though fear of infection from paper money is probably precipitating the end of cash. While notes and coins are convenient for small day-to-day payments – especially when there are power cuts or other infrastructure failures (such as software virus pandemic) – we could still make promises (the oldest form of money ever). One benefit would be to abolish all banknotes worth more than $20, forcing the criminals with large stashes of cash to come to the bank, and explain how they acquired so many high-denomination banknotes.

Another advantage would be that, with no real alternative to electronic money, then fees charged to vendors using EFTPOS (and the like) would have to be abandoned.

The most important thing would be that we would understand that – at certain times – it is irresponsible to not spend our incomes, and that such anti-economic behaviour as money hoarding would incur a cost. It would mean that high-income frugal people would be incentivised to earn less in the market economy. There would no longer be an incentive for people to earn very high incomes, and there would be more space for today’s disadvantaged people to earn adequate incomes.

In other words, interest rates that at first sight should lead to more spending could in fact lead to sustainable living. In turn, as some people choose to earn less and lend less, then conditions would gradually come to favour a return to higher (zero or positive) interest rates.

Thinking outside the box

Even orthodox and conservative economists can think out of the box. They can apply their economics’ training to new situations, so long as they can free themselves from non-economic constraints on their thinking.

Too much of our policy chatter is conducted either by people unable to think like economists – most politicians, bureaucrats, journalists, businesspeople – or economists and financial analysts who have studied economics but whose cultural backgrounds have inhibited them from grasping the creative power that economic thinking can give them.

Substantially negative interest rates represent one very important thought experiment that well-taught students of economics can lead public discussion on.

————————————–

Bernard Hickey: Why Reserve Bank Governor Adrian Orr prefers negative interest rates to QE, Stuff, 12 Aug 2019

Susan Edmunds: What is a negative interest rate, and what would it mean for you? Stuff, 19 May 2010

Clancy Yeates: ‘Unthinkable’: Negative interest rates now routine around the world, Stuff, 23 Sep 2019

Kenneth Rogoff: The case for deeply negative interest rates. Think Outside, 11 May 2020

From an interview with Geoff Bertram, on The Panel, RNZ 22 May 2020

Wallace Chapman: “Are we setting up our future generations, our future children, to be born into a life of national debt?” [He mentions the on-line Fabian Society discussion, held on 23 May, and introduces Geoff Bertram.]

Wallace Chapman: “Need we be concerned about this massive debt that we are getting into?”

Geoff Bertram: ” I don’t think we need to be for a number of reasons. First off, we have lived with, for decades, a set of ideas about public finance that are intensely conservative. They lead to the Budget Responsibility rules, the idea that the government should be a small part of the economy, the idea that budgets should always be balanced, and most importantly, the idea that we can never print money to fund a deficit under any circumstances. Those three propositions go out the window now. You are looking at a situation where the economy has crashed; the only agency you have to pick it up and get it back on its feet is government. … The budget stimulus itself is completely manageable. … The old austerity story that most of the media tell and indeed the government itself has been telling – with the budget responsibility rules – isn’t the story we should have in our heads. … Government has an important role stabilising the economy, and in the face of a major downturn, expansionary fiscal policy is exactly what needs to be done. What happens to the money supply is a secondary concern. … “

Wallace Chapman: “Can’t we compare the analogy of a house? So, if I have a house, I have a budget for that house, and I have to even up the expenses and the incomings; I can’t be spending more than the household earns.”

Geoff Bertram: “That’s the analogy that’s completely wrong. Government is not a household.”

Wallace Chapman: “How so?”

Geoff Bertram: “Well it doesn’t have to have money in advance, it doesn’t have to have the funding in hand before it goes and buys something. If you are a household and you want to buy something, you have to have cash or you get a loan from the bank or the hire-purchase company before you can make the transaction. If you are government, you write the cheque, that’s it.”

Geoff Bertram, at Victoria University of Wellington, was my best economics’ lecturer; both from his breadth of knowledge and insight in economics, and, generally, as a teacher and communicator.

It was so refreshing to hear a view on the media that reflects economics, without the bourgeois continence that comes with so much financial commentary and policymaking these days.

Counter-Cyclical Spending: the Advantage of being a Large Organisation

The above discussion contains two main ideas – ‘counter-cyclical spending’ and ‘printing money’ – and how they relate to each other.

In a short radio interview, it can be very difficult to make fully-nuanced points; its really a matter of getting out the main message as simply as possible, something Geoff Bertram did very well.

So let’s consider the difference between a household and a government. In some respects they represent the opposite ends of an organisational spectrum, with businesses and non-government non-profit organisations in the middle. One of the important distinctions is size; the smaller an organisation generally the less able is it to spend without having prior income.

For the most part, households spend pro-cyclically, meaning they spend more when their incomes are higher, and less when their incomes are lower. (This tends to be true of businesses as well.) Nevertheless, even small households have credit facilities, such as credit cards, pre-arranged overdrafts and flexible mortgages. Additionally, households can negotiate credit facilities on an ‘as-required’ basis (such as hire-purchase). And, many households have past savings to draw on; sometimes quite substantial savings.

These households can, to some extent, spend countercyclically. This means, to spend more when household incomes are lower, and to spend less when household incomes are higher. Indeed, such spending is guided by changes in interest rates. When household incomes are lower, then interest rates should be low, encouraging households to save less (including withdraw more from past savings) and to borrow more (especially to borrow using already available credit lines).

The key message here is that deficit spending (preferably quick deficit spending making use of credit facilities already in place), at the appropriate phase of the economic cycle, has a stabilising impact on the wider economy in which these households exist.

While interest rates represent one incentive to practice countercyclical spending, the wider knowledge that such spending is stabilising for one’s community and society will also motivate some people to follow such a spending strategy. In other words – when people become ‘we’-focussed rather than ‘I’-focused, which is the mindset which we understand the Covid19 restrictions are all about – people may behave in a way that can best be described as ‘community altruism’. Countercyclical community altruists spend more when other people are spending less, and they spend less when other people are spending more.

Businesses can follow similar strategies, using their credit lines to invest at times when sales are low. Generally, bigger businesses can do this more easily than smaller businesses, because they have deeper pockets and more developed (and often cheaper) credit lines. While most businesses do not behave this way, there are some which do so; some of these do so by being smart rather than being altruistic. Such countercyclical businesses buy assets when they are cheap and sell assets when they can get a good price for them. (While these latter businesses do, incidentally, help to stabilise ‘the economy’, they may also aggravate inequality; already-rich businesses are the best placed to become even richer this way.)

How should governments behave? The neoliberals (who Bertram might call ‘extreme financial conservatives’) intimate that governments should behave procyclically, like the households Chapman referred to. Further, in this regard, four of the five parties in the New Zealand are essentially neoliberal (New Zealand First is the only exception). These four parties worship the neoliberal sacred cow of ‘fiscal responsibility’.)

The alternative is ‘old-fashioned Keynesian’ policymaking, as Geoff Bertram put it. The emphasis here is countercyclical fiscal policy. Labour (as in the biggest party of government in New Zealand) sometimes uses countercyclical rhetoric, and, as the principal party of government, has indeed agreed to expand its outlays during the Covid19 emergency. However, its willingness to do so remains very measured.

Bertram states that only governments can act in a sufficiently countercyclical way to get economies out of a ‘major downturn’. While he is correct, countercyclical spending by other parties still helps; further, countercyclical spending by a wide range of government and non-government parties able to do so generally smooths out the boom-bust business cycle, minimising the incidences of major downturns.

The message is, in troubled times, deficit spending is good; indeed, it is very good. ‘Deficit’ is not a dirty word.

Big governments are generally better placed than small governments to do this. In particular, when there is a global economic emergency, enlightened governments behave countercyclically to support the global economy, and not just to support the national economy. (This is where New Zealand First, and nationalist parties in other parts of the world, fall down.) Thus we saw, after the 2008 global financial crisis (the GFC), the Chinese government – and to a lesser extent the governments of the other BRIC countries (Brazil, Russia, India) – spent on investment projects sufficiently to get the world economy out of what some economists call the ‘great recession’.

Another reason why governments should take the lead in deficit spending is that governments – with their very large balance sheets – can generally borrow at lower interest rates (lower financial costs) than other parties. This is, for the most part, because governments have the reserve power of taxation. Creditors favour lending to governments at times when many households and businesses are practically insolvent.

Financing Government Deficits

The second main point that came up in the interview related to ‘printing money’. This is not a useful term, because it is used too easily in a pejorative way; further ‘printing money’ is a somewhat out of date term, as is the expression ‘writing a cheque’.

I find it most helpful to think of money as a social technology, a man-made medium that circulates through the economy as a lubricant. It makes no sense for any machine (in a sense, ‘the economy’ is a machine) to operate with less than the optimum amount of lubricant; further, while there is no reason why anybody would want a machine to be over-lubricated, the costs of over-lubrication are substantially lower than the costs of under-lubrication.

Essentially, Geoff Bertram was saying that the Government has no credit limit with the country’s Reserve Bank. So, when a government ‘writes a cheque’ using its account at the Reserve Bank, the Reserve Bank will not bounce the cheque. It is not only governments that have this special privilege; so do registered trading banks. But governments can make most use of this facility, because governments have ‘customers’ with substantial and immediate spending needs; new money lent to governments can be injected directly into circulation in the wider economy.

New money is created whenever a bank acquires a promise; it means that the bank’s balance sheet expands on both sides of its ledger. There is no necessary requirement for a bank to shrink its ledger tomorrow, having enlarged its ledger today.

The promise may be a new promise – which counts as a new loan; especially in our context, a new loan to the government. Or it maybe an existing promise – a bond – that is already in circulation.

For the most part, the (notionally independent) Reserve Bank of New Zealand buys existing bonds when it wishes to increase the amount of money in circulation. The sellers of those bonds – usually financial businesses – lend this new money to the government (creating new government bonds) through a competitive tendering process. In a depressed economy, interest rates will be very low.

(The other way the Reserve Bank increases the money supply is by lowering its interest rate, thereby incentivising the commercial banks to lend more to businesses, households and other organisations.)

It’s a somewhat convoluted financial mechanism, in New Zealand at least, to create money. The net effect, however, is that the government borrowing from the Reserve Bank creates new money, and injects it into circulation by spending it or by paying benefits to households. When there is ‘fiscal space’ – as in a major downturn or a pandemic – the government can draw on its overdraft facility, to the extent that it needs to.

In an economic emergency, this ‘government borrowing’ / ‘money printing’ is not in any way inappropriate or irresponsible. It is what a government must do. Further, when the economy does revive, taxation revenue automatically increases, meaning that most likely some of that government borrowing will be paid back; indeed as other new money is created due to increased private borrowing from banks, private debt can supplant government debt. But never will all that government debt be paid back, because a responsible government itself never wants to be the agent of economic depression; no government wants the economy that it rules over to have too little money in circulation.

To Finish

Money and debt are matters that – like people having sexual relations – enable sustained and flourishing intergenerational societies. Yet – like sex – they can be matters of prurience, misunderstanding, and ignorance. We do ourselves a great disservice when we hold these attitudes towards important day-to-day matters of normal life.

PS Follow this link for a chart and comments, relating to Japan’s history of budget deficits, and its resulting government debt.

Surpluses and Deficits of Different Economic Sectors

This new series of weekly charts looks at forty years of surpluses and deficits in different countries, showing what makes these countries tick, and why they were where they were – financially speaking – at the end of the 2010s. (We may note, for comparative purposes, two-decade financial balance charts for New Zealand, United Kingdom and European Union’s Eurozone were published last week.)

While we should be careful about regarding any particular financial signature as good or bad, it is probably true to say that the ideal signature would be that, for each of the main sectors – private, government and foreign – its balance would be zero. That would make for very uninteresting charts!

Second from ideal would be that features preponderant in one decade would be offset by opposite features in other decades, meaning that – in the long run – each sector would be in something close to balance. Our first country, Japan, is far from meeting these ‘ideal’ criteria.

Japan is the world’s country with easily the largest public debt, at 238 percent of GDP in 2018(compared to 19.9% for New Zealand). Yet Japan is, and has been for at least four decades, an economic powerhouse. Indeed, Japan has at least as much economic capacity (relative to population) to deal with the Covid19 pandemic as New Zealand does. The level of public debt prior to a pandemic is of little consequence.

Japan’s Signature

The dominant feature of Japan’s financial signature is its persistent – and persistently high since the mid-1990s – private sector financial surpluses. Japan is very much a nation of excess saving. (The saving sectors are the sectors with positive financial balances.)

What is generally meant to happen is that the two parts of the private sector complement each other: households save, and businesses borrow to invest. Thus, private sector balances should be close to zero, most of the time.

We see from the chart that it is normal for the Japanese private sector to not spend at least five percent of its income; that would normally be understood as Japanese businesses being unable or unwilling to invest at anything like the level required to dispose of household savings. The story however, at least from the early 1990s, is that Japan’s business sector – like its household sector – has been larging a saving sector, rather than an investing sector.

So, Japan’s private savings have been lent to other sectors. Who has spent, as debt, what the private sector could have, but didn’t?

The answer, for the most part, is Japan’s governments – especially its central government. That is indicated by all the red below the chart’s zero balance line. Japan’s government-sector debt is so large because in just about every year the government sector has run a deficit. In many of those years, the government deficits have been higher than five percent of GDP. Simply put, those many years of deficits, unbroken since 1992, have added up to an overall public debt of nearly 240% of GDP.

Not all of Japan’s savings have been spent by its government. In every year since 1980, Japan’s private sector has been a net lender to the rest of the world; to Japan’s (green) foreign sector. This shows up in Japan’s national accounts as an ongoing current account surplus; we may think of it as an excess of exports over imports. Or, put another way, Japan’s private savings (Japan’s credit) have been, to some extent, the means of payment for the rest of the world’s imports of Japanese goods and services. These imports from Japan have been paid for using credit extended by Japan; these imports have – so far – been paid for by Japanese people, not by the foreign purchasers of these imports.

While the Japanese government has spent far more than it has collected in taxes, Japan as a whole – Japan Inc. – has spent significantly less than its national income. Japan is a creditor nation, not a debtor nation; a creditor nation with a debtor government.

From Japan’s point of view, the foreign sector is the entire world outside of Japan. This ‘rest of the world’ has, in total, bought more than it has sold. This is because Japan has sold more goods and services than it has purchased; after all, for the whole world, the amount of goods bought must exactly equal the amount of goods sold.

Japan’s Financial Crisis 30 Years Ago

Japan, along with a number of other countries (eg Australia), had its big financial crisis in the early 1990s. On the chart, it is easy to see when Japan’s financial behaviour deviated from its signature pattern, in the late 1980s.

The late 1980s was a time when Japan, while still an important exporter of high tech manufactured goods, got caught up in a wave of financial speculation, triggered by a big rise in the Yen to US dollar exchange rate. This wave of speculation included an extraordinary real estate bubble. Even Japan’s businesses started borrowing heavily and spending the borrowed money on land and other temporarily appreciating assets.

These speculative private sector ‘behaviours’ were out of character for Japan. Not all Japanese indulged; Japan’s private sector only ran a deficit in one year, 1990.

The result was that huge swathes of Japanese businesses were technically insolvent through the 1990s, and even into the early 2000s. Nevertheless, most the insolvent businesses were able to carry on, so long as they were still able to sell goods to their government, and to foreigners. Japan’s private sector paid down its huge debts as fast as it could, and took on very little new debt despite record low interest rates. (Much of the huge private surpluses in the 1990s were private debt repayments, rather than new savings.)

If Japan’s government had not increased its debt – ie acted as debtor of last resort – then capitalism would have collapsed in Japan. The Japanese government did – thankfully – what all governments should do when interest rates are close to zero. It borrowed.

Japan’s Aversion to Tax Increases

Japanese people dislike paying taxes. In 2014, and again very recently, a seemingly small increase is sales tax has led to significant cutbacks in consumer spending, creating recessions.

The Japanese middle class prefers to lend to its government, rather than be unduly taxed. (It turns out that this is true for many other countries too.) Taxation is a method through which governments force households to not spend part of their income. Saving for the indefinite future – ie saving without any intent to spend the savings – is a method that enables the government to spend money that would otherwise have been taxed. The method, of governments taxing less and borrowing more, works surprisingly well.

The orthodox ‘macroeconomic’ view is that governments should run ‘cyclical’ deficits during economic contractions (eg recessions and other periods of below-average economic growth) and run surpluses during economic expansions. Japan’s government does not follow that prescription. Rather, Japan’s government run’s structural deficits because Japan’s private sector runs structural surpluses. Not only does it work, but it would work just the same if Japan’s accumulated government debt was 500% of GDP.

Japan’s Fiscal Contract

Japan’s implicit contract is that its households will only ask the government to pay back the money if they face some kind of financial emergency. Indeed individual households do face emergencies sometimes, and do get to withdraw their savings. Japan’s middle class knows that, because they happily let the government spend their money, then the chance of a major national emergency is minimised. They expect that, as a sector, Japan’s private households will almost always have savings, and who better to spend those surplus balances than the government. With wholesale interest rates around zero, the Japanese government doesn’t even have to pay interest on its debt.

It is also worthy of note that, over the last five years, Japan’s Budget deficit has been around five percent of GDP every year. Yet its public debt to GDP has only increased from 231% of GDP in 2015 to 238% in 2018, according to tradingeconomics.com.

Japan’s government does not pay back its public debt. Instead, it invests in Japan. Thus, Japan can afford the Olympic Games in 2021; because of its public debt, not despite it. Further, Japan has one of the highest life expectancies in the world, and relatively low inequality. Japan’s people have no reason to fear government debt.

The chart above shows how a spending pie-chart may differ for a closed economy, compared to its income chart. For this example, the government sector has a financial deficit (ie a budget deficit) while the household sector has a financial surplus.

In this case the government sector slice is 30% of the spending pie instead of 25%, meaning that the government is spending 20% more than it is earning in taxes. The government deficit represents 5% of the gross domestic product (GDP, which is the total divided pie). The government deficit is financed by a household sector surplus, which as also 5% of GDP. Households spend less than they are entitled to; they save, which is what households normally choose to do. The only matter of interest is whether it is the business sector or the government sector that runs a deficit to match the household surplus. (In this case, the business sector is running a zero balance.)

The chart above differs from last week’s chart, by including a foreign sector. The foreign sector can only be depicted for debtor economies (which includes New Zealand and the United Kingdom, but not the European Union). [Pie charts cannot show negative numbers.]

Here, the foreign sector earns 5% of all income generated in this economy. It is a net figure, the difference between what foreigners earn in this economy, and what locals earn in foreign economies. In this example, the whole divided pie is gross domestic product (GDP), and the part that excludes the foreign sector is gross national income (GNI).

If we choose to call this economy New Zealand Inc, then the fact that GNI is less than GDP defines New Zealand Inc as a debtor economy.

New Zealanders may spend more than GNI; indeed they may spend more than GDP even if GNI is less than GDP. This third measure is gross national expenditure (GNE). If GNE is more than GNI, as it almost always is in New Zealand, then the country can be said to be running an external (or current account) deficit. When a country such as New Zealand is running an external deficit, then the country’s foreign sector is running a financial surplus.

For New Zealand, in each of the last few years, the private sector (households and businesses combined) has run a deficit, the government sector has run a surplus, and the foreign sector has run a surplus. While this is a common pattern for New Zealand, it is uncommon for most other countries. Most countries run a private sector surplus most of the time; which means that they typically run government sector deficits and/or foreign sector deficits.

(What may be confusing is that a foreign sector surplus is reported in a country’s national accounts as a current account deficit. When foreigners are net savers, then our country is a net spender. Our country runs a deficit with respect to the rest of the world, and the rest of the world runs a surplus with respect to our country.)

This chart shows that, from 2015, New Zealand has run private sector deficits (ie negative surpluses), government surpluses and foreign surpluses. This has meant that our governments (especially the central government) have spent less than they earned, and foreigners (on average) have spent less than they earned. Households and/or businesses have spent more than they earned (by taking on more debt, or by spending past savings).

This New Zealand pattern was much more striking in the 2000s’ decade, and briefly reversed for a few years after the global financial crisis (GFC).

While New Zealand, as a nation, has benefited from a foreign surplus in every year shown – indeed from every year since 1974 – it does not mean that New Zealand Inc has had unsustainable debt with respect to other countries. What is does mean is that New Zealanders (private sector) have incurred substantial debts that have never been repaid; nevertheless New Zealand Inc remains solvent because it has had no difficulty in servicing its historic debt, and has had no difficulty in extending its historic debt.

(Note that no 2019 data have been given for New Zealand, because the IMF estimates the 2019 government balance by averaging the known balance to the year ending June 2019 with the forecast balance for the year ended June 2020. The forecast for the present financial year is muddied by the Covid19 pandemic.)

Unlike New Zealand, we can see that the United Kingdom government sector last had a financial surplus in 2001. However, like New Zealand Inc, United Kingdom Inc enjoys the opportunities it has to spend more than it earns. Like New Zealand Inc, United Kingdom Inc is a substantial debtor nation with respect to its foreign sector, and is quite solvent. United Kingdom Inc has faced no requirement to pay back its debt to the rest of the world.

When we look at the Eurozone, which commenced in 1999, we see a very different picture. The private sector has been running surpluses since 2001, and is an important creditor to Eurozone governments. Increasingly, however, the Eurozone private sector has become an important creditor to the rest of its world, including to the private sectors of New Zealand and United Kingdom.

What would the Eurozone private sector do if the private sectors of New Zealand and United Kingdom attempted to repay this debt? It would create all sorts of problems for the Eurozone private sector, which would first try to solve its problem by relending it to New Zealand Inc and United Kingdom Inc. Failing that, it would have to seek out riskier alternative debtors.

The Eurozone is where it is because it is where it wants to be, running foreign sector deficits. If forced to run foreign sector surpluses (ie accept debt repayment), then the Eurozone’s private sector and/or government sector would be forced into running deficits. That’s precisely what the Eurozone people and governments do not want.

If New Zealand and the United Kingdom and the Eurozone are happy to maintain this financial relationship, then there may be no problem to solve. However, there is a problem, and it mainly relates to the Eurozone’s financial relationship with the world’s developing economies.

Income in an Economy

The chart above shows how income is distributed in an economy. It shows three major sectors: Government, Business and Households. Households are the principal sector; governments and businesses serve households, and are accountable to households. The chart is a pie chart, representing the economic pie. (For now, ignore the outer ring of the pie; the pie is the part divided into sectors.)

In this stylised example of a closed economy (ie no foreign sector), government receives a portion of national income (which is practically the same as gross domestic product). Part of the government income share goes to infrastructure, part goes to collective services like healthcare and education, and part goes on alms and other welfare payments. If the government sector – which includes local governments – saves part of its income, then it runs a surplus. (Repaying debt is a form of saving.)

The business sector both retains income and distributes income to households. The part that it retains – in blue – can be either invested on capital goods and services (eg buildings, machinery, staff training) or saved. If the sector as a whole saves part of its retained income, then the business sector runs a surplus. (Otherwise it runs a deficit, which is simply a negative surplus.)

The same applies to the household sector, represented here by six families: Waititi, Cooper, Patel, Duff, Tan and ‘destitute’. If the household sector saves more than it spends, then it runs a surplus.

By definition, the sum of the sectors’ surpluses adds to zero. So, if any sector is running a surplus then at least one other sector must be running a deficit.

The incomes shown represent entitlements to shares of the goods and services that contribute to the pie. For example, if the Cooper family run a business that makes barrels, then the business sector (or any other sector) may use part of their entitlement by purchasing those barrels. The profits from this cooperage business represent both income to the Cooper business and income to the Cooper household, enabling the Coopers to buy other stuff.

Surpluses and Deficits

If most households save part of their incomes, then the household sector most likely runs a surplus. (In most countries the household sector runs a surplus most of the time.) We generally expect the business sector to run a deficit about equal to the household surplus. That leaves the government sector with a balanced budget. However, if the business sector does not run a large enough deficit, then the government sector must run a deficit too. If, under these circumstances the government sector resists running a deficit, then not all the goods and services in the pie will be purchased, and the whole economy will shrink next year. (Imagine a missing slice from next year’s pie; that slice is called unemployment, or, strictly, ‘involuntary unemployment’.)

In this chart, debt is easily understood. Most likely the Waititi family does not wish to spend its full income entitlement; and maybe this year the Duff family wants to spend more than its income entitlement. So the Waititis can – directly or indirectly – transfer some of their present entitlement to the Duffs. The usual arrangement will be that the Duffs agree to transfer  – directly or indirectly – a slightly greater amount from a future year’s pie to the Waititis.

The Waititis run a surplus this year, and the Duffs run a deficit. The Waititis contract to run a deficit in the future, so that the Duffs can run a surplus in the future. That is what a debt contract is; a commitment on the part of a creditor who runs a present surplus to run a future deficit, a commitment to be repaid. (The Waititis can defer this future obligation if sufficient new debtors can be found, in the future.)

Economic Growth

If next year’s income pie is bigger than this year’s pie (ie it contains more goods and services), we call that economic growth.

Inflation

The market may put a dollar value on this year’s income pie. If we produce essentially the same pie next year, but the market places a higher dollar value on next year’s version, then the economy has experienced inflation.

Relaxation

The ‘relaxation’ ring around the pie represents the extent that our economy is not ‘maxed out’; it’s the reserve capacity of the economy. It represents the ‘life’ part of a society’s work-life balance. (Economists call this ‘voluntary unemployment’; many do not realise that voluntary unemployment is a vital part of our wellbeing.) Our economic happiness is measured by the enjoyment that we get from consuming the goods and services that we buy, plus the opportunity to chill out and enjoy what we have.

We could increase our living standards by increasing the size of the relaxation outer ring, while keeping the economic pie the same size. Or, we could increase the size of the pie while keeping the size of the outer ring unchanged. While both possibilities reflect an increase in both living standards (aka economic happiness) and the productive capacity of the economy, only the second of these options would be measured as economic growth. Thus many economists have a growth bias in favour of that second option.

There are other options that represent increased economic happiness. The ‘relaxation’ option that needs to be mentioned here is to have a smaller income pie, and a bigger outer ring. This is the option that, coming out of the Covid19 pandemic, makes most sense. We will want to spend less – to buy fewer goods and services – while retaining a highly productive market-based economy. The solution to the Covid19 economic crisis is a structural readjustment to our work-life balance, maintaining economic capacity while spending and working less.

The Pie Chart representation has a Weakness

The sixth household – ‘destitute’ – does not appear on the pie chart, but does appear in the chart’s legend; the ‘legend’ is the table of labels to the right of the chart.

‘Destitute’ is statistically invisible, unless made visible by including it in the table. ‘Destitute’ has no income, no work-life balance. In this situation, the destitute household has little choice but to try to run a deficit, but will struggle to find a creditor. Failing that, destitute can only survive by alms, known by economists as income transfers.

Alms are good, but economic rights are better. Surely ‘destitute’ has some economic rights; rights that grant it at least some income from the pie? Yes, but only if society is grown-up enough to acknowledge and properly confer such rights. Otherwise ‘destitute’ remains visible only to those who will see.

Fact Checking

On Mondays – or Tuesdays after public holidays – National Radio’s Kathryn Ryan runs a session called ‘Political Commentators’. On 28 April, from the right was regular commentator Matthew Hooton. From the left was Neal Jones who is listed as: “Chief of Staff to Labour Leader Jacinda Ardern, and prior to that was Chief of Staff to Andrew Little”.

It was good to hear Hooton now becoming something of an advocate for a Universal Basic Income (UBI), though (given past comments) I am not clear yet that he understands it fully.

It was concerning, however, to hear Jones – a man close to Prime Minister Jacinda Ardern – repeating falsehoods about Universal Basic Income. Jones said that a key problem with UBI is that it would be paid to New Zealand’s richest man, Graeme Hart. That comment reflects an attitude that is dismissive of universalism. Universalism is the basic principle that underpins democracy; and, more generally, underpins ‘horizontal equity’, the idea that we are all equal in our economic and other civil rights.

Perhaps even more importunately, Jones’ comment on Tuesday was false.

It was me who in 1991 first coined the term ‘Universal Basic Income’; my aim was to connect the established concept of ‘Basic Income’ (‘Citizens Income’ in the United Kingdom) with insights gleaned from New Zealand’s tradition of universal income support, as established in the 1938 Social Security reforms and as reaffirmed in the 1972 Royal Commission on Social Security.

The mechanism I envisaged in 1991 is: “a universal tax credit available to every adult – the universal basic income (UBI) – and a moderately high flat tax rate”.

(Refer to my ‘Briefing Paper’ From Universal Basic Income to Public Equity Dividends (2018) which in turn links to a report that links to, among other papers, my original 1991 University of Auckland Policy Discussion Paper. To the best of my knowledge, this was the first ever published use of the name ‘Universal Basic Income’. The name started to be used internationally after I presented a paper at the Basic Income European Network conference in Vienna in 1996.)

Since the 1990s, the concept of Universal Basic Income has become poorly defined, and tends to be seen, simplistically, as an unfunded handout, a kind of regularly paid ‘helicopter money’. In that sense, it is true that some proposals that use the name ‘Universal Basic Income’ would raise Graeme Hart’s income. But not all versions of UBI. In those versions that are truest to the underlying concept – Graeme Hart’s income would be unaffected.

So, once again, for the remainder of this essay, I am going to avoid the term ‘Universal Basic Income’. The term I will use here is ‘Universal Income Flat Tax’ (UIFT, if you will). This is a mechanism made up from a universal income and a single (flat) rate of income tax. Thus, the universal income is funded by the removal of the lower marginal tax rates. In the New Zealand case, that means the universal income replaces the 10.5%, 17.5% and 30% marginal tax concessions. With a single tax rate of 33% and a universal income of $175 per week, Graeme Hart would be completely unaffected, at least in the implementation phase. This represents a reconceptualisation of income tax rather than a redistribution of income.

The Mechanism at Work

Rather than labour the point about how we introduce the UIFT mechanism, it’s good to get the vision of the mechanism in action. It is a mechanism that addresses the issues of stability, precarity, equity, and sustainability. UIFT is not a sufficient panacea to cure all our economic ailments, just as the introduction of MMP did not remove the politics from politics. UIFT is, however, a mechanism that makes the necessary possible. It is an enabling mechanism for the evolution of liberal democracy. The Covid19 global emergency has shown more clearly than ever that our present ways of thinking about public finance are disabling, and as such threaten to bring about an end to liberal democracy in some parts of the world.

(Much of the disabling is due to the fact that many welfare benefits continue to be delivered to us in the form of tax exemptions, allowances, concessions and graduations. These are attractive to recipients because they are unconditional – they do not have to be applied for – and to policymakers because they barely contributes to public debates about social welfare. The big problem with this kind of benefit is that, when a person’s income declines, these tax-related benefits also decline. We tend to think of benefits as a cushion, or a safety net. These tax-related benefits represent the cushion being removed when we fall. The best benefits are cushions that are there for us when we fall, rather than cushions given to us when convalescing from an uncushioned fall.)

So, imagine that we already have in place a 33 percent income tax and a weekly basic universal income of $175. (For present beneficiaries, this $175 per week would represent the first $175 of their present benefit. This situation does not represent any substantial change from the income distribution we have become accustomed to. It is a conceptual change.)

How could we use this tax-benefit mechanism to address the four issues: stability; precarity; equity; sustainability?

Stability.

Stabilisation is the familiar issue of how societies use fiscal and monetary policies to manage normal economic downturns and upturns in the economy. Governments expect to pay more welfare benefits in an economic contraction (eg a recession), fewer benefits in an expansion. And governments expect to collect fewer taxes in a contraction, more taxes in an expansion.  Thus, we expect the government to run budget deficits during contractions and budget surpluses during expansions.

When we have welfare benefits that are easy to access, this process is known as automatic stabilisation. While such automatic benefits are good for the recipients, they are especially good for the stability of the economy as a whole. (Countries that already had a system of benefits in place before the Great Depression of the 1930s – notably Sweden and the United Kingdom – emerged from that emergency comparatively quickly, in 1932. Other countries – for example France and the United States – were still in economic depression at the onset of World War 2.)

The more bureaucratic the process of accessing benefits – and the more conditional those benefits are – the less efficient is the stabilisation process. (Reliance on benefits delivered as tax concessions is especially destabilising, because these benefits are lost when they are most needed. A particularly egregious example of a destabilising benefit in New Zealand at present is the In-Work Tax Credit, which, as its name suggests, is lost when recipients lose their employment. Another such benefit is the KiwiSaver annual tax credit of $521, which is progressively lost as a person’s gross weekly income falls below $1,043.)

Under the UIFT mechanism, the full universal income is retained when a person loses their job, or suffers a reduction in wages. And it’s instant, a genuine cushion; not a subsequent palliative. Further, this cushion benefit cushions people with partners still in work; many people (especially married women) do not qualify at all for present targeted bureaucratic Work and Income benefits.

When there is an economic expansion, under this UIFT regime, government income tax revenue increases by 33 cents in the dollar for every extra dollar of gross income; thus, during a normal economic upturn, the government moves into surplus more quickly and more automatically.

Precarity.

Precarity is the situation where many people are employed on short-term contracts; some may be expected to be ‘on call’ without being compensated for that restricted time. It also refers to many the self-employed people – free-lancers and small business operatives – whose labour incomes fluctuate with little predictability.

For these people, a basic universal income works as a personal economic stabiliser – a cushion allowing some income tide-over during down times – with a higher marginal tax rate which offsets this cushion in the good times. With the UIFT mechanism in place, these people can remain self-reliant, and will have minimal need to engage the welfare bureaucracy which needs to prioritise those people with structural income incapacity.

Further, the unconditional benefit component of the UIFT creates some incentive for self-employed workers to retain work-life balance, by not overworking at certain times, and by not penalising them when they need some downtime, such as family time.

Equity.

Equity is a central component of democracy. And equity represents the equal ownership of productive resources. Private equity represents the equal ownership rights of the principals of private businesses. Public equity represents the equal ownership rights of all economic citizens over those many productive resources which are not privately owned. Equity-holders expect to receive an economic return on their equity. There is no law of economics that restricts this capitalist expectation to private shareholders.

The consequence of this liberal democratic reasoning is that the universal income component of UIFT can be properly understood as an economic dividend; interest on the public equity represented by the public commons. And it also means that a universal income that is basic (ie low) need not remain low under all possible future circumstances.

Just as political citizenship reflects the universal suffrage, one person one vote, so, in a mature democracy, economic citizenship requires a universal publicly-sourced private income. One person, one equity dividend. A reflection on equity principles suggests that the universal income part of the UIFT mechanism should be understood as a public equity dividend.

A universal publicly-sourced private income is capital income, not labour income. It is a social dividend, not a wage. It is a yield on public capital. It is social capitalism at work, not socialism.

The word ‘equitable’ must be associated with an equalising mechanism. Here we may consider both financial inequality and time inequality.

A liberal democratic dividend means that one substantial part of the economic pie is distributed equally, and that the remainder of the economic pie is distributed unequally in line with market forces. It means that people experiencing substantial declines in their market incomes retain a personal stake in their liberal democracy, through their rights to an income from the public share. And it means that people experiencing increases in their market incomes do not simultaneously draw increases from the public share. Financial inequality is mitigated.

Time inequality is addressed, because the inclusion of an unconditional universal income gives encouragement to the overworked to work less, and for the underworked to work more. Without such an equalising mechanism, workers, who also lose public benefits when they lose private incomes, are disincentivised from reducing their work overloads. Likewise, people with little or no work know that, with UIFT, they will retain their publicly-sourced private income when they take on increased market workloads. The overworked work less and the underworked work more. For the unemployed and the underemployed, a basic universal income is work enabling; it facilitates rather than restricts labour supply.

Sustainability.

This issue relates to both the issue of robots and the issue of climate change. It relates more generally to the possibilities of being able to enjoy high living standards in a more relaxed form, and having a supply-elastic economy. At present we try to have a full-capacity (ie, ‘maxed out’) growing economy where we have little choice but to overproduce and overconsume. At present, our overconsumption is someone else’s livelihood.

The robot concern is that our economies will become too productive. The only thing scary about that scenario is that, at present, we have no social mechanism to distribute the proceeds of that productivity. In the absence of such a mechanism, the endgame is extreme inequality, which means (among other things) extreme poverty. An advanced society with extreme poverty has high unemployment of bothpeople and robots.

How does a mature UIFT mechanism address this issue? It addresses the issue by both raising the amount of universal income and by raising the income tax rate. If done in a neutral manner, then the overall extent of economic inequality (measured by the Gini Coefficient) would be unchanged.

In order to avoid increased inequality, both the universal benefit amount and the tax rate would need to increase. This would be a simple reflection of increasing capital income relative to labour income; more gross income accruing to ownership relative to income accruing to effort.

(At this point we might note, Graeme Hart, as a likely robot investor, would be even richer than he is now, before tax. While the UIFT mechanism would give him an increased public equity dividend, he would also pay more income tax. The net effect of these three influences on Hart’s income should be that his ‘disposable income’ would increase at about the national average.)

As this process of rising incomes and rising income taxes unfolds, it means that the public share of the economic pie increases relative to the market share. This increases the willingness of the overworked to work less. And it increases the understanding that paid work is a cost rather than a benefit. Rising public equity dividends relative to total income gives the necessary signal to the entire workforce to work less for money, and to embark on more projects that may not deliver financial returns. More voluntary unemployment, less involuntary unemployment. More ‘slack’, in the sense that slack represents market supply elasticity. An economy with more slack has the capacity to increase production when it needs to. In normal times, liberal capitalist economies should not be ‘maxed-out’; only in certain types of emergency.

We can now imagine a democratic capitalist world order, in which people choose to both earn less and spend less, while being assured that basic economic needs are covered, as well as many higher-order needs. Ironically, in our Covid19 lockdowns many of us gained a sense of that, though missing the coffee and ambience of the local café. But not missing the wider rat-race.

It is this slower living – which we have seen briefly – that has the potential to bring about environmental sustainability. We have heard more birdsong. We have smelled the flowers. We have heard that the people in China have lately seen the stars in the firmament.

We can have a high productivity economy without maxing-out our countries’ GDPs. We just need a mechanism to make the necessary possible.

What is the First Step?

In New Zealand, the first step is to reconceptualise our tax-benefit system, and in the process to apply a little relief to those who work hard without receiving high wages. This step would have easily been funded through tax revenue in 2019, pre-Covid19. Today this first step should be funded – and immediately, eg through the 14 May 2020 Budget – by Reserve Bank credit, just as the emergency wage subsidies have been funded.

See my Five Examples for any further clarification about how the transition to UIFT would affect different people.

In many other countries, the process will be more difficult. They have more complexities to unravel (compared to New Zealand) in their present income-tax scales. Australia could make the transition quite easily, with a 37% tax rate and a basic universal income of $240 per week.

We need political commentators with open minds.

————————————–

References:

Universal Basic Income (or Basic Universal Income) and Covid19. Scoop or Evening Report, 7 April 2020.

From Universal Basic Income to Public Equity Dividends (2018); Policy Observatory Briefing Papers, AUT, Auckland

Public Equity and Tax-Benefit Reform (2017); Policy Observatory, AUT, Auckland

The Universal Welfare State incorporating proposals for a Universal Basic Income, Keith Rankin, University of Auckland Policy Discussion Paper No.12, 1991

Constructing a Social Wage and a Social Dividend from New Zealand’s tax-benefit system, paper presented to the Basic Income European Network (BIEN) international conference; Vienna, Austria, 12-14 September 1996.
(Note that in this paper, I used the terms ‘full universal basic income’ and ‘adequate universal basic income’. My use here of words such as ‘full’ and ‘adequate’ are suggestive of the aspiration that a basic income could be more than a basic dividend; rather a substitute for a wage, and therefore a possible disincentive to engage with the labour market. However my emphasis in this paper – and subsequent papers – was the ‘social dividend’, a basic universal income that might eventually evolve into a non-basic payment.)

In his big-spending infrastructure announcement yesterday, Grant Robertson reinforced what many political commentators say about him – he’s electorally smart, but way too conservative to be a genuine leftwing minister of finance. Robertson does what is right for winning votes, but not necessarily what is in the interests of the country or even Labour’s own constituency.

For details of the spending announcement, see Jason Walls’ The Government will borrow $19b to help fund $12b of new spending on infrastructure projects. Basically, the new package provides a general idea of the quantity of new capital expenditure and timeframe for spending, but it lacks specifics on exactly what will be funded.

Why the announcement was smart

The spend-up on infrastructure is electorally smart. It answers critics from across the political spectrum who complain that this government has not addressed the infrastructure deficit brought about by previous National and Labour governments.

That’s why plenty of economists have given the package a thumbs-up. For example, Donal Curtin has blogged to say, “It was, from an economic perspective, completely correct” – see: Give that man a DB. And he suggests any opposition to the announcement is suspect: “Show me someone who disagrees with this boost, and I’ve a better than average chance of showing you a nutter.”

There has also been widespread endorsement of the general package from across the political spectrum. The Herald’s business editor Liam Dann pointed to this accomplishment: “Today’s announcement was ‘welcomed’ by BusinessNZ, The Employers and Manufacturers Association and the Council of Trade Unions. Getting the thumbs-up from these three in one afternoon is no mean feat” – see: What a time to be a finance minister (paywalled).

Dann also gave credit to the Government’s adroit timing and packaging of the new spending: “The Government gets to make a pre-Christmas splash with surplus spending headlines, it gets another bite in the quiet news vacuum of the New Year when it announces the highly anticipated specifics of new transport spending. And it still leaves plenty of fiscal headroom for voter-friendly acts of budget generosity later in 2020.”

Similarly, Herald political editor Audrey Young suggests that the lack of detail in Robertson’s announcement will work in the Government’s favour: “That will come in early January to kick-start the Government’s election year. Robertson presented the outlines of a turbo-charged capital spending plan with enough lack of detail at present to avoid providing a target for the National Opposition. But essentially, Robertson and Prime Minister Jacinda Ardern will be able to announce the details of a $7.6 billion in new capital spending at the start of election year” – see: Robertson sets up Govt nicely for election year (paywalled).

She also suggests that this was all deliberately designed as an election year gambit: “Robertson denied that delaying the big reveal until 2020 is anything to do with election year – he would say that, wouldn’t he?”

Robertson has brushed aside this suggestion. Tova O’Brien reports: “The Finance Minister says it would be ‘cynical’ to describe the Government’s $12 billion infrastructure spend on transport projects as an election year slush fund” – see: ‘Cynical’ to describe infrastructure spend as election year slush fund – Grant Robertson.

TVNZ’s Katie Bradford says she’s happy to be called cynical, complaining that the delay in providing information on what exactly will be funded looks remarkably “like an election year bribe” – see: Christmas hasn’t come early for infrastructure industry, despite Government’s extra $12 billion spending pledge.

She says the Finance Minister “failed to identify one single shovel ready project. Or even reveal how many of those will be started next year. Given the Infrastructure Commission has a list of over 500 projects, worth $21 billion, Mr Robertson could’ve plucked a few of those out of the hat and said work would be starting soon.”

Business journalist Pattrick Smellie also says that the configuration of yesterday’s announcement means “it is almost inconceivable that the government doesn’t have an election year hip pocket splurge of some sort up its sleeve for the ordinary New Zealand family” – see: Why so conservative, Grant?

Smellie suggests the Government has cleverly left itself with plenty of room to manoeuvre because the announcement relates to one-off capital spending and not increasing operational spending, which means that next year could see increases for welfare beneficiaries and possible tax cuts via a shift in income tax brackets.

The focus of the Government’s increased capital spending on transport, and roading in particular, is also seen as clever. Hamish Rutherford labels the new-found fashion for roads “pragmatic” because, “Although building new roads may be less transformational than the Government hoped, it may also be smart politics. Not only are such projects popular with many voters, they can provide measurable productivity gains” – see: Grant Robertson promises a wall of transport demand into the future (paywalled).

Rutherford also explains that for a government that needs to find projects that are almost ready to go, and with fewer construction industry capacity restrictions, roading is the perfect area to spend on.

Similarly, Thomas Coughlan argues that the Government’s spending decisions are being influenced by partisan strategic gain: “this Government’s funding of additional roads robs National of the oxygen it needs in opposition. The party is yet to release its transport policy document. But Robertson’s announcement today of $6.8b in additional transport spending could steal National transport spokesman Chris Bishop’s thunder by gazumping some of Bishop’s promises” – see: Politics and economics are strange bedfellows, but they’ve made $12b of magic.

Why the announcement is conservative

Although on the surface, Grant Robertson’s announcement involves massive amounts of new spending, many commentators have been underwhelmed by it. According to Thomas Coughlan’s article above, although economists have approved of the announcement, the level of new spending was “not nearly as much as they’d wanted”. He cites KiwiBank senior economist Jeremy Couchman as believing “the Government still had more room to lift borrowing to tackle the infrastructure deficit.”

Similarly, journalist Bernard Hickey wrote this morning that the amount of spending is “nowhere near enough to fill a yawning and growing infrastructure deficit”, and points out that new debt levels will barely increase on what they are now.

Westpac’s economists also dismissed the significance of the new expenditure, labelling it a “bit of a damp squib”, and suggesting that because “the spending would be spread over many years have only a small impact on the economy” – see Tom Pullar-Strecker’s Infrastructure boost cheers business groups but economists fear lag.

The same article reports the Infometrics firm as arguing that given current low debt levels, the “Government could have announced a much larger investment”.

Pattrick Smellie suggests the levels of new spending could be considered “unduly conservative – even miserly”. He says “Having raised expectations the government could push out the ratio of net Crown debt to 25 percent of gross domestic product from the current 20 percent limit, the forecasts unveiled in today’s Budget Policy Statement look tame” – see: Why so conservative, Grant?

The focus of the spending should have been entirely different, according to leftwing political commentator Chris Trotter, who has written a scathing blog post, labelling Robertson’s announcement “disgraceful” with a “courage and compassion deficit” see: Grant Robertson spends up large – on the Establishment!

He asks what Greta Thunberg, or even the Greens, would have to say about the fact that only a tiny fraction of the new spend – $200m – is being allocated “to making the Zero Carbon Act mean something”. Instead, the bulk of the money is going on roading.

Trotter believes the Greens should be outraged: “the Greens’ response to his announcement is just plain sad. To be clear, their transport champion, Julie Anne Genter, has been humiliated. The road transport lobby has effortlessly outmanoeuvred whatever policy wonks she’s had pitching the case for rail.”

He is also astonished that none of the $12bn is being spent on welfare, despite this government claiming to be “transformational”, and the Prime Minister preaching the “politics of kindness”. For Trotter it’s a betrayal of Labour’s voters: “Never mind that pouring money into the pockets of our poorest citizens is the fastest and most effective way of delivering our economy a much-needed shot of adrenaline. No, never mind all that. Finance Minister Robertson and Social Welfare Minister Carmel Sepuloni have no intention of upsetting the Establishment by giving beneficiaries anything remotely resembling a Christmas present.”

Finally, Gordon Campbell makes the economic and compassionate case to the Minister for Child Poverty Reduction, Jacinda Ardern, that increased government spending should actually be going on implementing the recommendation of the Welfare Expert Advisory Group – see: On welfare vs infrastructure spending.

Labour held a very successful annual party conference in the weekend, projecting a strong degree of unity, progress, and positivity. And perhaps most importantly, it showed it was willing to deliver a major dose of spending where it will yield results, reiterating that this is a government focused on traditional Labour concerns.

This was all best conveyed by veteran political commentator Richard Harman, whose conference wrap-up title said it all: Labour finds its happy space. He begins like this: “For over 30 years the Labour Party could have only dreamed of the conference it has just held. Labour has finally found its happy space; devoid of factional rivalries; bitter personality feuds or fundamental challenges from the party activists to the Parliamentary wing. Delegates who were there for the fights of the 80s or even more recently the Cunliffe challenge in 2012, were left reminiscing about the bad old days.”

Yet, Harman also concludes his insightful column by pointing out that there’s not much about Labour’s latest big announcement for National to disagree with: “That maybe defines this weekend’s conference as much as anything else. This was not a conference that strayed very far from the political centre.”

Generally, the media coverage of the conference was very positive. For the best example of this, see Laura Walters’ article, which reports: “An invigorating, young energy was inescapable at the Labour Party annual conference” – see: Labour aims to balance the old and the new.

Walters draws attention to some of the changes of personnel in the party, which perhaps “signalled the party’s transition to a younger, more vibrant organisation”. She says “there was an unmistakable emphasis on the young” throughout the conference.

Although there was attention on new blood in the party – especially the election of the party president, Claire Szabó – some pointed to the party potentially still keeping too much power with the “old guard” and the Labour leader. Reporting from the weekend, Henry Cooke argued that Labour can still “can feel dominated by people who have done their time with the party”, and he pointed to some candidates for next year’s election who seem stale – see: Labour needs to be more than just Jacinda Ardern.

Cooke’s larger argument was that the party is now entirely reliant on the pulling power of their leader. He pointed to the conference programme to illustrate this: “The booklet for this weekend’s Labour Party conference features 13 separate photos of its leader, Prime Minister Jacinda Ardern, and none of any other MP. Grant Robertson gets in to one picture on the side, but only alongside his leader.  Leaders are always important to political parties, but the degree to which Ardern defines Labour is extreme. This is a party supposedly built on the backs of cooperation between workers and not a single person, no matter how strong their brand is.”

From “Let’s Do This” to “We’re Doing This”

The major focus of conference organisers was to attempt to dispel a sense the Labour-led Government was failing on its self-declared “Year of Delivery” slogan. The problem they were seeking to neutralise was described on Saturday by Jason Walls in his column: Spirits high ahead of Labour’s conference – but has the party been transformational enough?. In this, commentators discuss some of the “embarrassing” failures and lack of progress that might concern supporters of the party.

Such is the level of concern, “it is understood Labour are facing increasing pressure from it’s base to revamp its [Budget Responsibility Rules] altogether and scrap the debt and spending limits.”

Similarly, Herald political editor Audrey Young wrote in advance of the conference about growing disgruntlement within the party – see: Jacinda Ardern’s Labour Party is less forgiving and patient (paywalled). But she wasn’t forecasting any major dissent at the weekend: “In the tightly choreographed conference programme there simply isn’t any opportunity for any public grumbling. But in the backrooms and side meetings, Ardern will be getting the strong message that the year of delivery has yet to be felt by some important elements of her party.”

Such dissatisfaction was also discussed by Thomas Coughlan in his pre-conference report, in which he suggests that “Labour’s ‘year of delivery’ is starting to look pretty ropey”. He compares John Key and Jacinda Ardern because they have both been inclined to “hoard political capital” instead of spending it on things they believe in – see: Jacinda Ardern heads to party conference ready to assert herself.

However, he felt the party’s popularity would mean discontent wasn’t likely to bubble up to the surface at the conference: “Ardern is winning wider political arguments and laying the groundwork for a long period in government. The sacrifices the party made in moving to the centre appear to have worked.”

Nonetheless, it was important for the party leadership to emphasise to supporters that the Government is making some serious progress on its agenda. Hence, the conference unveiled its new slogan: “We’re Doing This” – an update on the highly successful “Let’s Do This” from the election campaign.

Sexual assault allegations lead to a new party president

The other major negative that the party wanted to neutralise at the conference was the ongoing sexual assault allegations, which led to the resignation of the party president. Unsurprisingly, there was an enthusiasm for having a woman elected to the role of President, and Claire Szabó staved off a challenge from Labour’s Māori vice president and unionist Tane Phillips. Laura Walters reported: “Szabó ticked all the right boxes: her experience running a large organisation, her experience in Labour, and the fact she’s a woman” – see: Claire Szabó named new Labour Party president.

Szabó played down those identity issues in explaining her new position: “I think young women have played roles in the Labour Party traditionally, I don’t think that’s particularly new. The fact two young-ish women are playing leadership roles in the party is actually unremarkable… I think there’s plenty of precedent for two people of the same gender to play leadership roles in a party.”

For a backgrounder on the new president, see Audrey Young’s Claire Szabo elected new Labour Party president.

Szabó’s qualifications for navigating the party through the ongoing sexual assault allegation problems are emphasised by Henry Cooke and Collette Devlin in their opinion piece, Labour has a lot to clear up at its annual conference this weekend.

They report that the situation is the “elephant in the room” for the party, overshadowing everything else, as the official investigation into the matter continues. Cooke and Devlin argue: “Obviously having a woman – and a woman with serious experience outside of the party – would make sense as the party deals with the results of those reviews.”

The “nation-building” school spend-up

The big policy announcement of the weekend was designed to reassure supporters that this Government is still making progress on its “transformative” agenda. For months, critics have been scathing about Finance Minister Grant Robertson’s refusal to loosen the fiscal purse strings in order to deal with some of the problems in society such as infrastructure. See an earlier political roundup about the building pressure on the Government: Shouldn’t the Government be spending more?.

Robertson and Labour have shown they’re listening, committing to announcing both increased spending on infrastructure and on schools in particular. For the details of this, see Jason Walls’ Revealed: 2000 schools to get $400m bonus – what yours will get.

Not only is the Government making “the largest spend on school infrastructure in 25 years”, but it is also extending “the living wage to all non-teaching staff in schools, including cleaners, caretakers and grounds people.”

According to Audrey Young, such a policy will help the public forget about the rifts in the Labour Party, while being unlikely to get any real criticism from National: “If you were on the right of politics, you would complain that it is not targeted spending, that it is determined only by the number of pupils, not the condition the school is it. But is not one that you’d complain too hard about without sounding like Scrooge. She might not be delivering what everyone wants, but she is ending the year delivering the dosh” – see: PM Jacinda Ardern no longer feeling her way like some experimental PM (paywalled).

To get a sense of how favourably the policy will be received by struggling schools, see Tom Hunt’s article, Government funding boost for school like 40 fairs rolled into one. According to the principal of one Wellington school, the new funding would be “roughly 40 times what it made in a school fair. The money that would likely be spent re-cladding parts of the school before leaks started.”

RNZ’s political editor, Jane Patterson, says the school spend-up will be highly successful: “it’s a policy that will affect every community and families will be able to see tangible results, and in government terms relatively quickly, clearly a bonus as the party readies for next year” – see: Labour gears up for the 2020 election.

Furthermore, she says “it won’t do Labour’s relationship with the teaching sector any harm either”, and will allow the Government to argue it is part of their programme to “rebuild the nation” after National’s “nine years of neglect”.

There might still be some big questions about whether the Government has got the allocation model right for the schools. Although the total spend for the scheme might be calculated as about $700 per student, the funding is not actually being allocated on the basis of student numbers. Hence, it’s being pointed out that smaller schools are effectively getting much higher per-student funding than bigger schools.

For example, Henry Cooke and Collette Devlin point out that “Papanui Junction School near Turakina, which has a roll of 7, will receive the minimum of $50,000 – or $7,100 per student” – see: Government pumping $400m into school property, almost $700 per student.

Another Auckland principle says the funding model is mysterious, arguing there could be iniquitous allocations, for example: “The rollout’s just a little perplexing. You take a school like Avondale with 2700… they’ll be lucky to paint two or three blocks compared to a school of 580 which gets the same amount” – see RNZ’s Schools welcome maintenance funding boost, criticise allocation.

In terms of the bigger infrastructure spend – to be announced on 11 December – there is going to be plenty of disagreement about the best targets for funding. For an example of this, see Dan Satherley’s ‘Damn good idea’ to borrow, but money should go on roads – economist.

And there will be lots of other innovative ideas for where the money is best spent – see Alex Braae’s Credit cards out: Where all that infrastructure money should be spent.

Finally, the most colourful moment of the Labour Party’s conference in the weekend was the traditional story told by the party’s deputy leader about how “the coalition ending nine years of blue darkness”, and “preparing for the return of an election year taniwha”. You can read it in full here – see Kevin Davies’ The speech that delighted Labour.