Two Cheers for NZ’s Fiscal Responsibility Act

Researchers associated with Stanford University have produced a Sovereign Fiscal Responsibility Index that is an assessment of the strength of a country’s current and projected fiscal outcomes and the quality of its fiscal governance arrangements.

The 2011 rankings here put Australia top of the 34 countries in the index for 2011 and New Zealand second to top.  Australia and New Zealand have relatively strong existing fiscal positions, fiscal projections (to 2050) that look relatively sustainable and relative good fiscal institutions.

The achievability of fiscal projections out to 2050 is clearly a matter of opinion, and New Zealand’s fiscal outlook looks problematic to many given our history of government spending blowouts.

Less problematic is New Zealand’s top score for the fiscal governance component of the index.  Much of the credit for this must be given to the provisions put in place by the Fiscal Responsibility Act 1993 that are now in the Public Finance Act.  Its focus on achieving and sustaining debt at a prudent level through fiscal surpluses on average during each economic cycle could have been (but was not) tailor made for the purpose of giving New Zealand its top ranking.  It surely also deserves some credit for New Zealand’s relatively strong fiscal position, including, the battle by each of the main political parties in the last general election to establish themselves as the party best able to restore fiscal surpluses.

So why the current drive to improve the fiscal position and New Zealand’s underlying fiscal governance arrangements?  Here are two reasons:

  1. A responsible fiscal position is one thing, fiscal settings conducive to greater prosperity and a better quality of life for New Zealanders is another.(The Fiscal Responsibility Act was silent on the question of whether a large amount of low quality spending and unnecessarily high effective marginal tax rates were making New Zealanders at large worse off.  Yet these things matter.)
  2. The enormous increase in government spending in New Zealand between 2005 and 2009, in conjunction with the Christchurch earthquakes, and the drop off in tax revenues have spilled New Zealand into large, fiscal deficits that threaten to persist.(This is a problem independently of New Zealand’s ranking and it is an open question as to whether the Stanford ranking (based on 2010 statistics) fully captured the current extent of the problem.)

See here for an article on the proposed cap for government spending.

Subsidies Down, Productivity Up: NZ Agriculture (again)

The Institute of Economic Affairs, a United Kingdom think tank, has published a discussion paper, Liberating Farming from the CAP.  Its main purpose is to explain the need for Europe to reduce subsidies for agriculture under the Common Agriculture Policy (CAP) in order to raise productivity and innovation.  It reports that the annual cost of the CAP is set to rise from its current €55billion (about NZ$87 billion) to €63billion (NZ$100 billion) by 2020.

While reduced CAP subsidies would certainly help make New Zealand exports more competitive in the short term, the article is also a reminder that such a move would surely force major changes in European agriculture further out.  Indeed, at pp 18-19 the paper uses the removal of agriculture subsidies in New Zealand in the 1980s to illustrate how dramatic the structural changes can be.

The graph below (not from the IEA paper) illustrates just how dynamic New Zealand agriculture has been since 1985 in terms of multifactor productivity growth, both relative to the overall growth rate in Statistics New Zealand’s measured sector (4.5 percent pa vs 1.7 percent pa) and in a ‘before and after sense’ (4.5 percent pa vs 1.3 percent pa between 1978-1985 and 1985-2006).  Note however, that the 1978-1985 period is considered by Statistics New Zealand to be less than two complete cycles, so there is an ‘apples vs oranges’ aspect to the ‘before and after’ comparison.

Would a relatively poor widow be better off if she were richer but still relatively poor?

A columnist in the New Zealand Herald on Monday last week argued, in response to this Policy Matters Blog, that health researchers are right to focus on inequality and relative poverty because the columnist’s widowed relative could not afford to send her 11-year old son to school camp.

However, the suggestion that it is inequality that precludes the widow’s son going to school camp is oxymoronic.  She can’t afford to send him because she doesn’t have the money, which is a matter of absolute, not relative, income.

The focus on inequality and relative poverty implies that the widow would be no better off if everyone’s incomes were quadrupled.

2012 BPS: Treasury’s GDP Growth Projections Since April 2011: Timing Problems

Treasury’s macroeconomic forecasters have had the unenviable task of having to publish three sets of macroeconomic forecasts within around seven months.

Two major sources of uncertainty during this period have been the timing of Christchurch rebuilding and the evolution of the debt crisis in Europe.

The following chart compares the forecasts for the annual growth in real GDP (production side) in the recently released Budget Policy Statement 2012 with the corresponding projections in the pre-election economic and fiscal update and in Budget 2011.

The projections tell a common story of slow recovery, a peak with the Christchurch rebuild, followed by a tailing off to of the order of 3 percent pa growth.  The pre-election update forecasts stand out for being relatively bullish about growth in the first two years in the chart.

The marked difference between the forecasts at the start of this period (the blue columns) and those at the end (the green line) is that the peak growth rate has been pushed out for a year.

One can look at these projections and feel for the citizens of Christchurch – and for those in the construction sector who are no doubt trying to manage their capacity to participate in the Christchurch rebuild while avoiding major losses in the interim.

The Myth That SOEs Return 18.5% when the Borrowing Rate is 4%

Last year Roger Kerr wrote extensively on the myths of privatisation.  Two relevant pieces in relation to the above myth were: Privatisation Myths Need to be Busted and The Truth About Privatisation # 13: Government Finances Benefit

The fallacy arises from the failure to spot that if a SOE returned 18.5%, with the same certainty as the 4% return on government stock, the market value of the SOE would be so high that its rate of return to the owner would be only 4%.  To illustrate:

Maths Teacher:  If one unit of government stock provides an income of $4 a year, how many units would you have to buy to get an income of $18.50 a year?

Pupil:  Let’s see, 18.5 divided by 4 equals 4.625 units.

Maths Teacher:  That’s right.  So if the government sells any other asset that pays an income of $18.50 a year, and uses the proceeds to repay government stock, how many units of government stock could be repaid and what would be the reduction in the annual interest income paid on government stock?

Pupil:  4.625 units could be repaid, reducing annual interest paid by $18.50.

In short, under these assumptions the government would be selling the SOE at a 4 percent yield to the buyer, reducing its dividend income by $18.50 and using the proceeds to repay public debt at an annual savings on interest paid of $18.50.  The posited transaction is fiscally neutral.

Yet here is the widely respected Jane Clifton, The Listener, 3 March 2012 on exactly this point:

The opposition is asking why we would sell something earning us 18.5% because we are terrified of borrowing at 4% to keep it capitalised and performing?  The question [that] has to be asked of the Government … [is]: Are you mad?”

And here is Tracy Watkins, The Dominion Post, Saturday 25 February implicitly propagating the same fallacy

Given the healthy dividends paid to the Government by the state-owned power companies, selling them makes about as much sense to most people as hocking off the family business to pay your credit card

In a less myth-dominated public discourse, public debate would be able to focus to a greater degree on the national interest arguments for and against privatisation.

Friday Graph: Public Sector Wage Rates Holding Gains on Private Sector

Last week’s Friday Graph showed how much the public sector had outstripped the private sector in terms of filled jobs in recent years – and seemed to be holding its gains.

This week’s Friday Graph shows that much the same applies in respect of the latest Statistics New Zealand release of estimates of the rises in hourly labour costs.

click the graph to enlarge

The sold blue and purple lines show real hourly earnings for the public and private sectors respectively against the scale on the left hand side of the chart.  Expressed in June quarter 2006 dollars using the consumers price index (all groups) the average hourly wage rate in the December quarter 2011 was $29.21 in the public sector compared to $21.18 in the private sector.

The green line shows that the public sector average has risen sharply relative to the private sector average since the mid 1990s, (see the right hand scale).  The thick green line is a smoothed version of this curve.  (For the technically minded it is a Hodrick Prescott filter).

These graphs complement the 30 September 2011 Friday Graph here that showed that the burgeoning growth in the public sector has been associated with a squeeze on the competitiveness of the traded goods sector.

The Key government’s key economic decision in the term of the last parliament was arguably the decision to slow the growth in public spending rather than to roll the excesses back to a material degree.

Talking about Poverty

Poverty and income inequality and their links with other social problems have been the subject of many media reports in recent weeks.

Wealth gap linked to rise in infections was the headline of an article in yesterday’s Herald on the alarming rise in hospital admissions for infectious diseases.

Researchers at the University of Otago said that whereas the expected pattern for a developed country was a steady decline in the incidence of such diseases and related hospitalisations, in New Zealand they had risen by more than 50 percent in 20 years.

The increase was associated, they said, with a widening wealth gap and its social effects. On the same topic the Dominion Post quoted immunisation expert Nikki Turner as saying;

It appears to be particularly linked to the rise in socio-economic inequalities in our societies.… The burden of disease is falling disproportionately on some groups… with Maori and Pacific people carrying a heavy burden.   

It is almost as if those who have moved up the income scale have passed their share of the disease burden down the line.

The recent six-part Herald series Divided Auckland told a similar story: painting a distressing picture of the lives of Aucklanders living at the bottom of the income scale. But the articles focused mainly on the fact that some people are doing well, and the fairness or otherwise of that, rather than on why those who are struggling aren’t doing better, and what might be done about it.

The articles made a point of portraying the problem in Auckland as being one of absolute poverty – not having enough money for food – using growth in the distribution of food parcels as a measure of it.

Poverty is a highly emotive term. Internationally it is often understood to describe those who are living on less than US$2 a day, estimated by the World Bank in 2001 to be 2.7 billion people. While undoubtedly there are people, especially children, going hungry in Auckland, it is not because ‘income’ is less than US$2 a day.

One illustration of the complexity of defining poverty in the developed world is the evidence in OECD countries that obesity is more of a problem towards the bottom end of the income distribution scale.

It seems Auckland is no exception.  According to this article, a 2008 report by the Ministry of Health found that Counties Manukau led the nation in obesity, diabetes, high cholesterol and depressive disorders:

One third of the district’s adult population is obese – well over the national total of 26.5 percent – and kids don’t fare much better with 12.7 percent obese compared to the national total of 8.3 percent.

The survey says Pacific children and adults are at least two-and-a-half times more likely to be obese than the total population.

“In a sense we’d expect to be around the worst,” says Dr Jackson.

“We’ve got the largest number of children, the largest number of poor children and obesity tends to be related to deprivation and poverty – but we’d hope to do better than that.

To use the language of deprivation and poverty when referring to the issue of obesity or income distribution in South Auckland might strike many as being more than a little insensitive to the plight of the billions in the world who face real poverty without obesity.

How has the language of poverty, in the World Bank’s sense of the word, come to be associated with the issue of being at the bottom of the income distribution in a wealthy country?

One insight into the answer to this question is provided in The Welfare State We’re In, a book by James Bartholomew, in an afterword titled Why Do People Talk More About Poverty, Now That There is Less of It?

Bartholomew traces definitions and talk of poverty through the ages, looking specifically at Britain. Starting in the Middle Ages when the country suffered terrible poverty and at least 95 famines, he notes that in The Parson’s Tale, Chaucer defined the misery of poverty in England as ‘wasted hunger’ and ‘naked of body’.

Moving up to the Tudor period, though there were still famines, poverty was less common, and by the 19th century the lot of England’s poor had greatly improved. Then in today’s Britain:

The cost of food has fallen through the twentieth and early twenty-first centuries while incomes have multiplied. The percentage of income spent on food has fallen dramatically. Clothes, too, have become cheaper. More than 99 percent of households have a television. The major nutritional problem for the less well off in British society is obesity.

Yet as poverty has receded, talk of it has soared, according to Bartholomew, who notes that in the House of Commons in 2002, the word ‘poverty’ was used in 1307 speeches.

To work out why, he looks to two conferences.  At the UK Labour Party conference of 1959, just after the Conservative Party had won its third consecutive term, conference chairman Barbara Castle said glumly (in an aside):

“… the poverty and unemployment we came into existence to fight have been largely conquered.”  Her remark was a kind of explanation of why Labour had been in so much trouble for so long….Without poverty, what need was there for a Labour Party? It was a problem in need of a solution.

Three years later, at the conference of the British Sociological Association, a group of academics solved it, presenting a redefinition of poverty. They argued:

The amount given in what was then called supplementary benefit should be considered as the ‘poverty line’. Anybody with less income than that should be categorised as ‘in poverty’. Anyone with less than that amount, plus 40 per cent, should be termed ‘on the margins of poverty’.

And so, in what was described by one of the participants at the conference as “a mood of conspiratorial excitement”, poverty was redefined.   A British historian of this change, Keith Banting, described it as “explicitly political”:

There was a desire to shock – to use a word that, to most people, meant starvation, homelessness and lack of clothing.

Bartholomew concludes:

The word still carries the emotive force of the old meaning but now only means people who are less wealthy than others.

As the government proceeds with its Ministerial Inquiry into Poverty, it should focus on what needs to be done to improve the educational, health, work and other opportunities for people at the bottom of the income scale.

To blame their plight on those who are working hard and productively, or to present the position of New Zealand’s poorest as being in the same category as those facing desperate poverty elsewhere in the world is to fail to focus on how best to help them.