Migrants increase our income

February 10th, 2014 at 4:00 pm by David Farrar

NZIER report:

A new Insight from the New Zealand Institute of Economic Research (NZIER) shows that increasing net migration would lift incomes not just for immigrants but for the native population.
An additional 40,000 people a year for 10 years increases GDP per capita by a chunky $410 a year.

“A more ambitious population policy is needed to increase New Zealand’s population.” said Dr Kirdan Lees, Senior Economist at NZIER. “New Zealand’s point-based immigration framework gets the mix of migrants required about right. But we need to do more to keep lifting the number of migrants that come.”

Almost one-in-four New Zealanders are born overseas but the current policy of 45,000 to 50,000 migrants a year is too low and very arbitrary – bringing in more migrants would lift incomes.
Immigrants provide firms with new skillsets, allowing firms to access new markets, new ideas and new products. A deeper population base also helps firms to get big and offset initial start-up or fixed costs that can be high. But our work shows that the impact on incomes outweighs the inflationary impacts of migration.

International studies also point to positive effects of immigration.

“So let’s grow for it and plan to entice more migrants.”

I am a supporter of more migration. However we need to make sure our infrastructure is resourced enough to cope with the population growth. Also we need to make sure that the rate of migration isn’t so large that we end up with groups of migrants who do not integrate into NZ. But with those caveats, the benefits of migration are considerable.

NZIER on fiscal sustainability

October 24th, 2013 at 11:00 am by David Farrar

NZIER have done a discussion paper on NZ’s fiscal sustainability.

Their key findings include:

  • Without significant changes in fiscal policy, government debt is projected to head towards 200% of GDP by 2060.  
  • We cannot afford the same spending patterns and tax settings as in the past. Something has to give, and we have to start thinking about the trade-offs sooner rather than later.
  • Recent efforts to get the books back in black after the Global Financial Crisis and the Christchurch earthquakes have been commendable. 
  • The evidence shows that overly high taxes can be harmful to economic growth. 
  • In reality, we would expect fiscal adjustments to come about through a combination of lower government spending, broadening the tax base as well as lifting existing taxes.    

I’m against any lifting of existing tax rates, but not against broadening the tax base. Basically the level of tax burden as a percentage of GDP should drop over time, as that helps economic growth. This means most focus, in my opinion, should be on spending restraint.

They recommend:

  • Seeking a bipartisan agreement on meeting the costs of superannuation 
  • Focusing the social safety net on those who need it most, rather than the middle class 
  • Broadening the tax base to include a tax on land or a tax on capital gains
  • Better highlighting the choices of taxes and spending that are feasible for any given level of debt level over the next few decades so that Kiwis’ expectations can be better managed, and so that they start preparing themselves for a tighter fiscal future.   

I support all those. I think a land tax has significant economic value, and a capital gains tax is also useful, so long as it is comprehensive. But again, there should be reductions in company and income tax rates to compensate so it doesn’t just become a greater tax burden overall.

The paper is 26 pages long only, so very readable and a good contribution to the debate.

NZIER on who should set the cash rate

June 25th, 2013 at 2:00 pm by David Farrar

NZIER have published this note:

The Greens’ idea to use the Reserve Bank Board to make monetary policy might improve decision-making but using a board designed to represent industry, risks compromising the Reserve Bank’s independence and the goals of monetary policy.

So they’re saying collective decision making may be better, but not if those deciding are not independent.

Responsibility for monetary policy rests solely with the Governor of the Reserve Bank of New Zealand. Twenty-five years ago, monetary policy was tied to the neck of one person to maximise accountability for inflation targeting. Today most countries have adopted inflation targeting but use a board rather than a single person to set interest rates.1

Groups tend to make better decisions than individuals by using a wider range of information. That often leads to less extreme decisions.2 And decision-making by groups is more effective because members of the group contribute a greater variety of perspectives.3

I would note it can lessen accountability though.

Recently the Reserve Bank of New Zealand set-up an internal Governing Committee, comprising the Governor, Deputy Governors and an Assistant Governor, as a group to assist decision-making.

These innovations help the Reserve Bank form better decisions from a wide range of information and perspectives. That means the distinction between a single decision-maker and decision-making by a board is blurred by current Reserve Bank practice. 

So we expect better monetary policy from a board rather than a single person. But given the way policy is currently set these gains are unlikely to be large.4

In other words, the decisions are in practice collective ones.

Moving to a board structure has practical implications. We agree that like elsewhere in the world, releasing the minutes and voting record of the committee improves transparency.


But already New Zealand has a very transparent central bank. According to one measure, New Zealand ranks as the second-most transparent central bank globally.5 Publishing the board minutes is helpful but the Reserve Bank of New Zealand does not have a transparency problem. 

But let’s not pretend there is a huge problem.

It’s not clear what making the decision-making board more representative of the wider economy might achieve.

If the problem is improving decision-making, NZIER’s view is the Reserve Bank already receives considerable input from all parts of the economy as part of its regular information gathering process.

Including exporters and manufacturers on a decision-making board seems targeted towards a solving a different perceived problem: changing the objectives of monetary policy.

But good monetary policy is not about promoting exports: it’s about targeting inflation.
Ultimately, monetary policy is a technical activity. So any decision-making board needs the professional advice and experience of career economists that understand the economy.

Basically the proposal is an attempt to change the purpose of monetary policy by stealth.

NZIER on economic growth

May 30th, 2012 at 1:00 pm by David Farrar

Brian Fallow at NZ Herald reports:

The economic recovery will pick up speed only slowly, the New Zealand Institute of Economic Research says, as households shed debt and the Government withdraws stimulus amid anaemic world growth.

“The economy is stagnant,” says principal economist Shamubeel Eaqub, in the institute’s Quarterly Predictions, released today.

Historically low interest rates are not encouraging new borrowing and investing, as households and businesses focus instead on paying down debt.

Eaqub said periods of deleveraging typically lasted seven years, which would imply we still had the second half of the adjustment to go.

It is a good thing we are paying off debt, and saving more. But it does mean economic growth will remain fairly low for some time – in my opinion. No more debt fuelled growth followed by a crash hopefully.

The economy eked out growth of 1.1 per cent last year and NZIER is forecasting 1.5 per cent this year before it picks up to 2.5 per cent next year.

NZIER is among the more bearish forecasters. The consensus is 2.2 per cent growth this year and 3 per cent next year.

“We are less optimistic than most on the timing of the [Canterbury] rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery,” Eaqub said.

I’m down in Christchurch on Friday, so will be interesting to see how the rebuild is going. I think the really big issues are the cost of the new building code, and the private insurers.

Research shows success of 90 day trial periods

February 2nd, 2011 at 1:00 pm by David Farrar

NZIER have released research into the 90 day trial periods. What they did is:

Data are now available to analyse these impacts in the policy’s first several months in operation.1 NZIER has conducted an initial analysis of the publicly available data from Statistics New Zealand’s Linked Employer-Employee Database (LEED), including April 2009 to September 2009. Our analysis assessed year-over-year changes in total jobs, accessions (hirings), and separations (firings) from 2005 to 2009 for six size categories of employers in 17 industries. The analysis controlled for seasonal variation in employment by identifying second and third quarter figures separately. Simple regression models2 were estimated for the three employment variables. The models also included a variable indicating whether the trial period was in effect for the time period and firm size. The regressions used are a simple analytical technique; more complex models may be able to estimate the policy’s impact more precisely.

So this is an analysis of actual employer data from Stats NZ. So what did they find:

  • The trial period appears to have increased hiring. On average, hiring by SMEs was almost six percentage points higher than expected, given the relative performance of other firms and the annual hiring trends.
  • Total job numbers for these firms were also higher, by about two percentage points.
  • These positive employment outcomes happened while hiring overall was falling. The model found that hirings fell on average in 2008 and 2009.
  • There was little difference in hiring behaviours across industries.

A 6% improvement in hiring and a 2% improvement in job numbers are good outcomes. The extension of the 90 day trial period to all employers is a good thing.

Mining and incomes

March 30th, 2010 at 12:00 pm by David Farrar

The Dom Post reports:

More mining on conservation land could add about $2.3 billion a year to national income, or more than $550 a person, a study by the New Zealand Institute of Economic Research (NZIER) says.

The increased mining would mean economic benefits lifting gross domestic product about 1.3 per cent or more, NZIER says, based on figures from a 2002 study.

It’s good to have some figures around the potential benefits, because this has been lacking from the debate. All we have had so far is the estimate of mineral wealth, but I want to know figures for impact on GDP, balance of trade, current account deficit, crown revenue and debt, employment etc.

Ideally, one could have that data for each of teh areas proposed to be removed from Section 4.

The debate was not about a choice between mining and conservation, but getting maximum sustainable value from a limited resource, NZIER said. New Zealand was relatively well provided with protected areas, with 19.5 per cent of the total land in “large protected areas”, first equal with the United States. It was well ahead of the Organisation for Economic Co-operation and Development (OECD) average of 12.4 per cent.

Opponents of the plans to open up schedule 4 land to mining argued that any encroachment on conservation land would damage New Zealand’s international reputation, to the detriment of tourism and other exports.

“There is little evidence to support this claim, aside from a limited survey commissioned by the Environment Ministry almost a decade ago,” NZIER said.

It would be a good time to survey tourists and consumers about how mining affected their views of New Zealand’s “clean green image”.

Indeed. We already have 84 mines on conservation land incidentally.

Among English-speaking OECD countries New Zealand has the highest proportion of its land in “major protected areas”, the NZIER report shows.

There is also a high level of protected land for each person, at about 1.24 square kilometres.

But New Zealand also has the lowest per capita income, which is below the OECD average.

While comparisons were fraught with definitional differences, the comparison showed New Zealand to be “relatively well provided with protected areas, but relatively poorly endowed with the income to maintain them”, NZIER said.

A very good point.

All about economics

September 7th, 2009 at 2:21 pm by David Farrar

On Thursday I had a choice of evenings. I could go out for a drink with my attractive young visitor from the United Kingdom, or I could attend the annual general meeting of the New Zealand Institute of Economic Research.

For reasons that frankly elude me, I chose to go to the NZIER AGM. I was interested that they have an AGM, as I assumed they were a private company.

It turns out that the NZIER is in fact a non-profit incorporated society dedicated to economic research. Any “profits” they make they invest in teaching and promoting economics.

There has been a tendency by some on the left to try and demonise NZIER as part of the vast right wing conspiracy, producing reports to please their corporate paymasters.

Apart from the fact their 2009 NZIER economics award went to Brian Easton (whom I’m sure would not object to being described as definitely not part of the right wing), they have have around 100 members, from both the public and private sector. The members elect the Board.

I like their independence, in that the membership fee is relatively modest (for non individuals) at $1,700, and it means they are not beholden to any one large funder.

The AGM was a fairly brief affair, and was followed by the award to Brian Easton. The final paragraph says:

The “advancement of economics and its applications in New Zealand” requires decisions to be made, often in a political context. If politics is indeed the art of the possible, then the boundaries of what is politically possible, let alone desirable, will be widened if the interested and influential public has an adequate understanding of the reasons why certain actions might be considered by policymakers, and of what the consequences of those actions might be, or might be hoped to be. The Award’s recipient has been an outstanding economic journalist, and a participant in public economic debates, bringing unusually broad perspectives to issues of lasting importance, for over 30 years. The public of New Zealand has benefited greatly from his tireless work, and from the exceptional clarity of his writing. He has indeed “advanced the study and understanding of economic matters directly or indirectly affecting New Zealand”, as the Award seeks to recognise and promote.

I disagree with many of Brian Easton’s views, but have always enjoyed the clarity of his writings, and wealth of research. I also appreciated his willingness to debate issues – at one of my first Young Nationals conferences we had Brian and Roger Kerr debate economic policy, and it was a fairly lively debate!

After the presentation, we had an address from Dr Steven Dunaway. I twiittered a few extracts from his address, which got a bit of interested Q&A on Twitter.

Dr Dunaway is an Adjunct Senior Fellow for International Economics at the (US) Council for Foreign Relations. He is a former deputy director of the International Monetary Fund’s Asia Pacific department.

Dunaway talked about global imbalances and the prospects for the world economy (and New Zealand). It was pretty sobering stuff as the point was made economic growth in many countries post-crisis will not be anywhere near as strong as it was pre-crisis. He says

At this juncture, the situation overall is not encouraging. While some policies being pursued will facilitate the adjustment of global imbalances, actions in many countries appear likely to add to imbalances over time, and the lack of needed policy actions—especially structural reforms—in other countries will delay adjustment as well. Consequently, the outlook for recovery and growth in the world economy does not look good. With adjustment in imbalances occurring in the United States that will result in significantly slower growth in demand, the key challenge for the world economy will be to find other sources of demand to take the place of the U.S.

In other words, don’t expect the US to lead the world out of recession into growth. No surprise as their unemployment figures hit almost 10% this week. Guess the fiscal stimulus didn’t work that well!

However, this appears likely to be a daunting task. None of the
other major economies appear inclined to make the necessary changes in policies to deal with their imbalances and raise their demand. In these circumstances, the world is likely to face a prolonged period of slower growth and greater instability than it has known for several decades.

For a small, open economy like New Zealand, this situation will pose a very inhospitable environment. While there is little that New Zealand can do to change things, the key to making the best of a bad situation will be to retain the economy’s flexibility and adaptability.

So if we want unemployment to stop growing, and start shrinking, we need to flexible and adaptable. And it means we don’t have so much the luxury to say “Let’s just ignore all those minerals in the ground”.

He then looks at the US:

There are reasons to believe that the U.S. household savings rate will rise significantly above its current level. Households have experienced a substantial decline in financial wealth, as well as a sharp fall in the value of housing. Savings will have to rise as individuals seek to rebuild their wealth. …

The U.S. government will also have to increase its savings to deal with the massive fiscal deficit that has opened up, …

The conclusion is:

Therefore, it can be expected that national savings in the United States will rise substantially in the period ahead. Thus, adjustment in the U.S. savings and investment imbalance will take place and the current account deficit will narrow. Consequently, demand in the United States over the next decade or so will grow substantially slower than it has in the preceding three decades.

So how about Europe:

Europe is an unlikely candidate to pick up the slack in world demand resulting from slower U.S. growth. Major European countries—particularly Germany—look likely to remain heavily dependent on exports to drive their economies. This situation reflects in part a sense of complacency among the Europeans and a lack of political will, especially in current circumstances, to make some difficult policy choices.

A good start would be their agricultural protectionism and subsidies.

No serious consideration is being given to diversifying their economies by removing barriers that constrain Europe’s growth. There is no appetite for dealing with the significant rigidities that exist in labor and product markets. Instead, the Europeans are content to wait for world growth to resume.

But the biggest problem is the Euro:

But the biggest problem for Europe is within the euro area. The area’s southern countries (Portugal, Italy, Greece, and Spain) have become noncompetitive both within the euro area and externally. Since they are now members of the euro, they cannot rely—as they have in the past—on changes in their nominal exchange rates to produce a real depreciation in order to restore their competitiveness. They have only two choices. They can raise competitiveness by improving the efficiency of their economies through structural reforms. Or slow economic growth in these countries to allow an improvement in competitiveness through lower inflation than in the rest of the euro area. The latter is the likely way that competitiveness will be improved because of a lack of political will to implement needed reforms in these countries’ product and labor markets. As a result, the countries of Southern Europe are in for a long and economically painful adjustment. This adjustment is likely to severely test the future of monetary union and the euro.

Dunaway actually went on to say he thought some of those countries might even fall out of the Euro.

So we look at Japan:

Japan is expected to do little to pick up the slack in world demand. The country appears to be on the verge of slipping into its second major deflation in the last two decades.

And can they improve:

The only hope for lifting Japan’s potential growth rate and domestic demand over the medium term lies in implementing badly needed structural reforms—especially increasing the flexibility of product markets and improving access to the labor market. Enacting such measures would entail taking on entrenched vested interests and changing cultural norms.

The short version of this, was Japan needs to get way more women into the workforce.

And then China:

The low cost of capital coupled with the poor intermediation of savings by the major state-owned commercial banks has resulted in substantial resources being directed toward the large state-owned enterprises, which tend to be in capital-intensive industries. As a result, production in China has become very capital intensive, creating the rather ironic situation that output growth does not generate much employment growth in a country that has such a large pool of underemployed workers. The official targetfor growth is set at 8 percent because that level of growth is viewed as being required to produce the 1-2 percent of employment growth needed per year to absorb new entrants to the work force and reduce somewhat the substantial underemployment of labor in the rural areas.

So even China is no silver bullet. But some advice for them:

Financial market reform is also needed to improve the intermediation of savings in China. Lifting the cap on deposit rates would not only help push up the cost of capital, it would also increase competition in the banking sector and provide incentives for banks to expand credit to new customers. Bond and equity markets need to be more fully developed to provide alternative sources of financing for firms and a much broader
array of assets for households to invest in. Small- and medium-sized firms have had to rely largely on retained earnings or the assets of their owners to finance investment. Consumers also have had limited access to credit. Better credit access and higher yielding assets to invest in would reduce household saving and raise household incomes over time, boosting consumption.

And finally we have New Zealand:

The key to assessing implications of the current account deficit for New Zealand’s future is to understand the sources of the deficit and how it is being financed. New Zealand’s current account deficit does not really look to be part of the problem of global as defined in this paper. Structural problems in New Zealand’s economy do not appear to be a factor contributing to the deficit. Looking at macroeconomic level data, the deficit also does not appear to arise from a basic imbalance between savings and investment.

So far so good.

Some indirect evidence as to whether a serious imbalance existed between savings and investment can be inferred from the behavior of New Zealand’s exchange rate. If domestic demand in New Zealand (particularly driven by low savings) had been a major factor behind the rise in the current account deficit, then it would have been expected that the exchange rate would depreciate. Instead, the exchange rate appreciated strongly over the period after 2006 when the current account deficit was rising sharply. This currency appreciation suggests that it was capital flowing into New Zealand that in effect pushed the current account into a larger deficit.

A useful context for the debate over our current account deficit.

In the end, it is obvious that there is little that New Zealand can do to escape the effects of the slow recovery in the world economy that is in prospect. It can also do little to change this outcome. With a slow world economic recovery, commodity prices can be expected to be relatively stagnant for some time, especially prices for the type of “soft” commodities that New Zealand produces.

And finally:

To survive and prosper the best it can in such a hostile environment, New Zealand’s economy will have to retain its considerable flexibility and adaptability. This is the only way a small, open economy will be able to cope with the stiff challenges that it is likely to face.

And this is why it is important we have flexibility in not just capital markets, but also labour markets. I’m not an advocate for no minimum wage, but consider as youth unemployment soars, how many more young people may have kept their jobs if youth rates had not been abolished.

After the speech we had dinner at Icon Restaurant. Around 50 – 60 people all up. As I blogged in another post my table discussed the pros and cons of intensity based carbon credit allocations in trade exposed industries, and it amused me that it was probably the only time one could ever have such a discussion over dinner, with everyone participating!

So all in all, was an interesting night.

Goff should get to negotiate with Key

September 4th, 2009 at 8:02 am by David Farrar

I attended the AGM of the NZ Institute of Economic Research last night. After the AGM and guest lecture (which I will blog on separately) there was a dinner at Icon Restaurant at Te Papa.

It was perhaps the only dinner I had been to, where you could have a discussion about the pros and cons of an intensity based approach to credit allocations in an emissions trading scheme, and the entire table understood the discussion!

In discussing the ETS, it became very clear that the preferred options of the NZ business sector is for National and Labour to reach agreement on the ETS, rather than National to rely on the Maori Party or ACT. They want certainty of policy.

Now Labour and National do actually agree on around 32 of the 35 issues around an ETS. However the issues they differ on are pretty big – the dates certain sectors enter the ETS and the merits or otherwise of an intensity based approach (which I will try and blog on at some stage also).

Now NZ already has an ETS, passed into law. Labour did this in 2008. So if Labour and National do reach an agreement, it is Labour that is arguably making the greater concession in order to give businesses policy certainity.

The Herald reports:

Labour is trying to rope Prime Minister John Key into the climate change negotiations, saying leader-to-leader talks are the way ahead. …

This is an opportunity for Phil Goff. In fact again at last night’s dinner we discussed how if Labour does do a deal with National on the ETS, this could be the equivalent of John Key’s compromise with Helen Clark on the smacking law.

And if Labour do put the national interest ahead of partisan interest, and strike an agreement with National, Phil Goff deserves his day up on the podium with John Key, looking Prime Ministerial.

But the issue is at what stage do you turn this into a negotiation at the leadership level.  If I was advising John Key, I would have two reservations about negotiating with Goff at this stage.

  1. Can you trust him to be sincerely wanting an agreement, or is he just trying to get the PM involved so Key gets personally blamed when Goff walks away. Up until the Richard Worth affair, Goff would have been trusted. But his behaviour over the Choudary allegations, has dented Goff’s trustworthiness. And his use of confidential MFAT staff notes to embarrass Don Brash has not been forgotten either. In a negotiation both sides need to be able to put forward positions in confidence, and trust the other not to report the details.
  2. Can Goff deliver his caucus? Key had a strong enough grip on the leadership that he could strike a private deal with Clark, and cheerfully walk into Caucus and tell them all that they are now voting for the bill they have spent the last six months fighting. A deal with National might involve (for example) a change of stance on the intensity issue. Could Goff get his Caucus to agree to that, just to get him his day in the sun?

Now these are not reasons to not meet with Goff at all. If Labour does do a deal, he should be the one to get the credit and share the podium with the PM. For putting the national interest of policy certainty first, he would deserve it.

But such a meeting is unlikely to happen, until the lower level negotiators can report back that there are reasonable prospects of success.

Modified ETS recommended

June 18th, 2009 at 9:00 am by David Farrar

Nick Smith said:

A joint report by economic consultants NZIER and Infometrics concludes that a modified emissions trading scheme is the best way forward for New Zealand on climate change policy.

“This report is a useful contribution to the important debate on how New Zealand meets its environmental goals to reduce greenhouse gas emissions at least cost to the economy,” Dr Smith said today in releasing the report.

The report was commissioned by the Ministry for the Environment and provided to the Emissions Trading Scheme Review Committee as part of its terms of reference.

“This report concludes that a modified emissions trading scheme is the best way forward. I am releasing this report to assist with informed public debate on climate change.

“The report highlights that the costs to New Zealand’s climate change policy are significantly greater if other countries do not put a price on carbon. This reinforces the Government’s policy of aligning our response more closely with other countries.

Yep any post-Kyoto arrangement must include all major emitters.

Anyway let us look at the actual report. They note:

There are a number of policy options available to New Zealand to pay for any international liability. The options are all on a continuum between the following two ‘extreme’ bounds:

(i) The government purchases all of the liability offshore using general taxation to raise the revenue required to do so. In this scenario, no carbon price is introduced in the New Zealand economy.

(ii) The government introduces a price for all greenhouse gases in all sectors, with no exclusions. In this scenario, emitters face the entire burden of the international liability.

They conclude:

Our modelling shows that if the rest of the world takes steps to price carbon, and technological change is induced by this pricing, then a broad-based domestic carbon pricing scheme is the least cost way to meet New Zealand’s international obligations. Without action by the rest of the world or technological change, the least cost option can include the free allocation of permits and exemptions for some industries and/or gases.

My version of this is they say we should have an ETS. If the rest of the world signs up to a price on carbon, then our ETS should cover all sectors. If however major emitters (such as China and the US) do not sign up, then some industries should be exempted from an ETS – agriculture being my guess as the most likely.

Indeed I am right. They say:

On balance, our recommendation in the short run is to introduce an ETS with free allocation to competitiveness-at-risk sectors, with agriculture excluded if measurement of its emissions is prohibitively expensive. Free allocation should be output-linked and phased out as our competitors adopt carbon pricing. If agriculture is initially excluded it should be transitioned into the ETS, with free allocation if required, as measurement becomes economic.

It will be interesting to see what the Select Committee recommend.

NZIER on fiscal stimulus

May 15th, 2009 at 12:46 pm by David Farrar

NZIER have done a very interesting report on the balancing act between jobs and debt.

The fiscal stimulus of almost $10b over four years will result in an extra 10,000 jobs in the short run, but it will reduce future consumption by $160 per person per year. We can spend now, but we have to pay for it eventually.

And that is the key thing to remember – that debt has a cost.

We find that a policy that reduces the cost of employing people could boost employment more at a similar cost to long-run consumption. Better still would be well-targeted spending on infrastructure to deliver longrun productivity improvements. Given New Zealand’s longer term growth challenge, any fiscal efforts to stabilise the economy and avoid a more severe recession should have productivity at the centre of the policy radar screen.

Productivity growth is all important.

we find that the current package is likely to:
• generate an extra 10,000 jobs in the short run
• raise GDP in the short term by 0.6 percentage points
• lead to lower employment after 2012 and a 0.8 percentage point fall in long-run real consumption per annum than without the stimulus.

Again debt has consequences. And just think about how much more debt there would be with Labour – not just $1b+ for their pet tunnel, but they have oppossed every cost saving in the public service.

NZIER tax calculator

October 8th, 2008 at 4:21 pm by David Farrar

NZIER have done a very nice excel tax calculator.

The economy

October 8th, 2008 at 7:44 am by David Farrar

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

NZIER calls stagflation

July 8th, 2008 at 11:57 am by David Farrar

Stagflation is the nightmare of the 70s – high inflation and negative economic growth.

NZIER has just put out its quarterly survey of business opinion.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

That takes it beyond a technical recession to a full recession. They says firms are more negative abotu their own activity and their trading activity since 1998 and 1982 respectively.

Now what about inflation:

The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987. The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986.

This is why their press release refers to stagflation.

Calculating Tax Cuts

May 23rd, 2008 at 10:39 am by David Farrar

The Deloitte team who were behind me in the lockup gave me a copy for the blog of their Deloitte Tax Cut Calculator (now on their website) which is an excel spreadsheet.

It not only shows you how much your tax will be in Oct 2008, April 2010 and April 2011 but also what the same tax would be in Australia.

They have also calculated how much you need to earn to be paying less tax in NZ than Australia. It used to be $1,571,922 but now life gets better in NZ at merely $1,284,992.

The Visible Hand in Economics has also links to three other calculators

  1. Infometrics which gives you the annual and weekly reduction in tax and percentages
  2. Labour, which includes WFF for the breeders 🙂
  3. NZIER which has an Excel spreadsheet

Worth remembering that the annual figure for Oct 2008 will be half that, as it only applies for half the year.

NZIER helpfully also shows you what your tax would have been in 2000 in both NZ and Australia. So if you are on $100,000 you would have been paying the same tax in 2000 ($22,057 in NZ and $22,446 in Australia). In 2010 it will be $30,588 and $26,569 respectively. This assumes 3% wage growth.

Matt Nolan at TVHE also looks at the impact of both tax cuts and huge spending increases on inflation. He thinks it is possible inflation may hit 5%, which would suggest interest rates staying high for a while yet.

NZIER on Emission Trading Scheme

April 30th, 2008 at 5:29 pm by David Farrar

The NZ Institute of Economic Research has done a report on the impact of the proposed Emissions Trading Scheme. The report is 77 pages long. For those who don’t read the whole thing, here are some key points:

  • The ETS will reduce GDP by $900 million by 2012
  • The average household will have $600 less spending
  • A reduction in employment equivalent to 22,000 jobs
  • By 2025, GDP will be $5.9 billion less than without an ETS
  • The average household will have $3,000 less by 2025
  • Hourly wages will be $2.30 an hour less by 2025 than they would be without an ETS
  • The ETS will reduce emissions by 5% less than merely funding emissions reductions directly
  • The ETS may be bad for the climate as some NZ production will become uncompetitive and shift to countries where their increase in emissions will be greater than if they stayed in New Zealand. This is known as “leakage”
  • The ETS will see by 2025 a 12.9% reduction in dairy farming, a 41% drop in diary land prices and a 6.6% reduction in sheep and beef farming.
  • As the decline in pastoral production in NZ will lead to greater pastoral production elsewhere, the increas in carbon emissions will be 3 million tonnes – around 25% of the reductions from the total ETS.
  • Southland and Northland would be most affected by the ETS with a 3% drop in GDP, with Auckland and Wellington less affected.
  • Paying for emissions reduction out of general taxation would be cheaper and more effective.

So they are not saying we should not be in Kyoto. They are saying the ETS, as proposed, will cost us more than alternative ways of meeting our Kyoto obligations. And also leakage due to industry relocating to non Kyoto countries will actually be worse for the environment than the alternative of direct funding of emissions reductions.

So one can say slow down with the ETS and don’t rush it into law just because of the election, without being a climate changer “denier” or “sceptic”. This is about how best to meet the Kyoto obligation, and it seems apparent there is a lot more work needed to be sure we have the right model. What will be interesting is what model Australia adopt as there could be considerable merit in harmonising between the two countries.