Treasury says decriminalising cannabis would save $550 million a year

July 21st, 2016 at 12:00 pm by David Farrar

Stuff reports:

Decriminalising cannabis would generate money for the Government and ease pressure on New Zealand’s courts according to an informal Treasury report.

The documents obtained under the Official Information Act by Nelson lawyer Sue Grey came from an internal forum at the Treasury “designed to test policy thinking on a range of issues in the public domain,” Finance Minister Bill English said.

The documents reveal Government spends about $400 million annually enforcing prohibition whereas decriminalisation would generate about $150m in revenue from taxing cannabis.

Moreover it said reforming drug policies would “save money, ease pressure on the justice sector, and lead to fewer criminal convictions for youth and Maori”.

Drug prohibition as it is in New Zealand disproportionately affects males, Maori and youth – in 2001 Maori made up 14.5 per cent of the population but received 43 per cent of the convictions for cannabis use.

It also pointed out that “drug reform isn’t a particularly radical idea these days”.

“It’s supported by The Economist and the Global Commission on Drug Policy, as well as reports by our Health Select Committee and the Law Commission,” the report said.

According to Treasury about 6 per cent of cannabis users are caught by police but 95 per cent of those who are continue to use cannabis.

It isn’t official Treasury advice but still very welcome information to have in the public domain.

Several US states have legalised cannabis, and over the next couple of years we will have very robust data on whether doing so leads to increased harms from drug use. If the evidence is it doesn’t, then we should follow on from them.

Mediaworks almost loses Budget lockup for everyone

April 25th, 2016 at 4:00 pm by David Farrar

NBR reports:

The Treasury has confirmed it is to go ahead with a lock-up for journalists for the budget on May 26, despite the Reserve Bank’s decision to end the briefings.

In a note sent to media organisations, Treasury chief executive Gabriel Makhlouf said he had weighed up whether to end the practice. “On balance, I have decided that an embargoed briefing for Budget 2016 will be held as planned. However, I will continue to review both the overall status of future Budget briefings and the ability of organisations to attend, in light of the adherence to lock-up conditions.”

This means there was a serious chance that Treasury could have canned the lockups.

It is unfortunate that Mediaworks has not been punished in anyway for their breach of the Reserve Bank lockup. As I said, they should at least pay the cost of the investigation.

Treasury on ETS vs carbon tax

May 16th, 2015 at 12:00 pm by David Farrar

An interesting paper by Treasury on the pros and cons of a carbon tax vs an emissions trading scheme. Some people think there should be no cost added to carbon, but for those who think there should be, it is important to have the most efficient cost.

Treasury does not support replacing the ETS with a carbon tax. We think the ETS is preferable to a carbon tax, because it can provide certainty about the level of domestic emissions. This fits well with our international obligations, which set a limit on total emissions. Emissions trading schemes are also easier to link with other countries, which helps ensure that the lowest cost abatement opportunities are taken between countries.

If further emissions reductions are needed, we recommend increasing prices in the ETS by introducing a price floor, removing the two-for-one rule for emitters, or reducing free allocations

They go into the specifics:

The main difference between the two approaches is that carbon taxes provide certainty about the price but leave total emissions uncertain, while trading schemes allow the price to adjust to deliver a certain level of total abatement. We think that certainty about total abatement levels is more important than price certainty, because our international obligations require us to achieve specific amounts of emissions reductions. ETS’s are well-placed to achieve these quantitative targets.

So a carbon tax is arguably better for businesses, as it gives them price certainty. However an ETS is better for a Government as a tool to deliver a certain level of abatement.

Emissions trading schemes can be easily linked internationally, giving access to cheaper abatement opportunities overseas. This allows the market to find the lowest cost mix of domestic and international abatement to achieve an abatement target. This is particularly important for New Zealand, given that we have limited low-cost domestic abatement opportunities.

The problem is though that the cheaper abatement opportunities overseas have meant that the ETS hasn’t actually provided any incentive to reduce emissions in NZ, and hence we have an expensive regulatory scheme that isn’t actually incentivising change.

Treasury leading the way with OIA

February 20th, 2015 at 3:00 pm by David Farrar

Transtasman reports:

The Treasury is trialling the publication of its responses to selected OIA requests. The proactive release of individuals requests follow on from material such as Budget papers and Briefings to Incoming Ministers being released in bulk fashion for some time. Initial OIA requests released range from the Debt Management Office’s replacement of its Matriarch IT system through to Govt funding of NZ America’s Cup Teams. The argument for release is since the work has already been done to respond to the request and compile the information it might as well be more widely released.

I’ve been pushing for this for several years. A lot of very interesting information is released under the OIA, but is never seen by the public except the requester. The FYI tool is a great private sector initiative which allows responses to be viewed if it is used.

But what I’d like to see is:

  1. Govt establishes a
  2. All substantive responses to an OIA request are uploaded to the site a week after they are sent to the requester
  3. Uploaded documents are tagged with subject and portfolios tags to allow easy browsing

Good to see Treasury heading down this route of proactive release. I hope it leads to other agencies following.


How about tax cuts Treasury, instead of jam jars?

July 8th, 2014 at 9:00 am by David Farrar

Vernon Small at Stuff reports:

Treasury is working on a radical plan to set up a new “jam jar” fund to hold extra tax revenue to smooth income variations.

It says the “stabilisation fund” could operate as a stand-alone agency and be put in place if further debt repayment became politically unpalatable.

The fund was one of three options outlined in a pre-Budget Treasury document late last year and released yesterday.

It said there were three broad, but not mutually exclusive, options for so-called “revenue surprises”.

They were to pay down debt, commit it to “one or more existing funds (or ‘jam jars’), and create a new form of fund or jam jar (eg a stabilisation fund)”.

I’m very disappointed that Treasury did not look at a fourth option for revenue surprises. That is tax cuts.

If the Government has more revenue than it expected, then why not allow hard working taxpayers to keep more of their income?

One could have a policy that any surplus funds, greater than forecast in the last Budget, be refunded to taxpayers at year end.

So if the surplus projection was say $2.1 billion and the actual surplus turned out to be $2.9 billion, then the $800 million extra gets refunded proportionally to taxpayers.


This explains a lot with Labour’s sums

May 21st, 2014 at 4:00 pm by David Farrar

3 News reported:

Labour says New Zealanders can have confidence it’s getting its numbers right despite dumping a Treasury staff member from their position in the leader’s office.

Radio Live revealed a long-standing Treasury secondment has been terminated after a dispute over who should pay their salary.

This now leaves Labour with no independent number-cruncher, but leader David Cunliffe says his office has a strong policy team.

“We have very high grade, quantitative analysis and economic modelling skills in our office,” says Mr Cunliffe. “The team is led by the Honourable David Parker, who has my absolute confidence.”

Getting rid of the Treasury secondee is possibly the dumbest thing you can do in Opposition if you want to have credibly costed policies.

It has been a long-standing practice that Treasury will allow one of its staff members to be seconded to the Opposition Leader’s office, just as departmental staff are often seconded to ministerial offices.

The secondee, while no longer working in Treasury, has access to resources such as the Treasury model for forecasting the cost of policies.

I spent four years working in the Opposition Leader’s office and our Treasury secondees were Godsends. They had massive institutional knowledge, and added huge credibility to the development of policies and costings.

I can’t work out any reason the Opposition would turn down the traditional offer of a secondee, unless they simply don’t want their policies credibly costed.

There is no dispute over who pays the salary. It is always the Leader’s Office. When someone is seconded, you always pick up their salary. That is a red herring I believe.

So whenever Labour releases a policy, and claims the cost will be x dollars – remember that is is not a cost estimated by an independent professional. This is the cost that Labour has dreamt up.

I think I can understand why Labour don’t want their policies credibly costed. Look at this policy on the hoof by Labour today:

So Labour is pledging to insulate every single rental property in NZ. I’m outraged. How is it fair they won’t insulate my place also, just because I live in it. What if I transfer it to a trust and rent it to myself – will Labour then come and insulate it.

Also while they are here insulting my house, could they clean my windows also.

The desirability of part-payments for healthcare

October 21st, 2013 at 4:00 pm by David Farrar

Treasury announced:

Inaugural Treasury University Challenge Winner Announced The winner of the New Zealand Treasury’s inaugural University Challenge is Sarah Shier, a Master of International Business student at the University of Auckland.

Her essay on Health and the possibility of co-payments was judged the best among entries submitted by students from all of New Zealand’s universities and from a range of disciplines. Entrants were asked to write a 2000-word essay to answer one of three questions on Crown assets, health, and overseas investment.

“The calibre of Sarah Shier’s essay and those of the other finalists was very impressive,” says Deputy Secretary for Strategy, Change & Performance Bill Moran.

“In assessing pros and cons of extending part-payments in our health system, Sarah showed both sides of arguments and brought together evidence from several sources to make her case. She also looked at how different socioeconomic groups might be affected, anticipated issues, and put forward measures to address concerns. It was high-quality work and I congratulate Sarah on her success.

“This competition has been a success for the Treasury too. We wanted to give university students a feel for the range of work the Treasury does and let them test their analytical skills on real life policy issues. We also wanted to reward excellence in public policy analysis and the University Challenge was a great chance to do this.

“After this year’s success the Treasury is looking forward to running the University Challenge again in 2014.”

Winner Sarah Shier will receive $2,500 towards her university fees for 2014.

Well done Sarah. Her essay is here. Some extracts:

Increasing co-payments for costly medications creates the opportunity to improve patient access to clinically effective medicines. Additionally, expenditures would be reduced as patients opt for preventative treatments over costly hospitalisations. Co-payment reform would also address socioeconomic and ethnic inequalities in the healthcare system by ensuring that subsidies are provided for those who need them the most.

Nonetheless, if not structured correctly, increased patient payments may exacerbate ethnic healthcare inequalities in the status quo. Furthermore, policies ought to continue subsidising preventative care in order to reduce long-run healthcare expenditures.


Medical professionals argue that PHARMAC’s rationing policies have limited the availability of effective medications within New Zealand. A 2008 report indicated that “New Zealand has 84 fewer innovative medicines funded than Australia.” Limited availability of blood pressure and lipid level medication can be costly in the long run as patients seek more expensive treatment for largely preventable cardiovascular conditions. Cardiovascular disorders accounted for the largest percent of “avoidable hospitalisations” within a Canterbury Hospital study.

Increasing co-payments for medications that benefit patients but are restricted in the status quo would improve the quality and efficiency of the healthcare system. Funding limitations have driven PHARMAC to fund some medications for high risk individuals only. However, expanded usage of pharmaceuticals such as statins may benefit lower risk patients and strengthen the healthcare system by preventing unnecessary costs in the long run. Co-payments could be applied to drugs such as statins that are widely beneficial but expensive to provide.

And on targeting:

Although funding for low-income healthcare has increased, a disproportionate amount of current expenditures are spent on high decile areas. Since the late 1990s, healthcare funding has increased more for higher income deciles than the more needy lower income categories.

Increased expenditures on broad initiatives—such as the community-based Primary Healthcare Strategy— have been largely responsible for the discrepancy between deciles. As a result, combined spending on decile 1-5 areas dropped to 54% in 2010.

Under a co-payment reform plan, subsidies could be targeted towards low-income groups to ensure equitable treatment. Increased patient payments could be designated for higher income individuals with the means to afford a modest increase in their current co-pay.

I believe it is sensible to target health care subsidies to those on lower incomes, and have those better off pay for a larger proportion of their own health needs.

A key point the Greens gloss over

October 11th, 2013 at 2:00 pm by David Farrar

Russel Norman has blogged at Frog Blog:

The Treasury released papers last week recommending that the Reserve Bank move towards a committee structure for making future decisions on the Official Cash Rate (OCR). New Zealand is now alone in relying on a single person – the Reserve Bank Governor – to set the OCR. No other country in the developed world leaves such an important decision to one person.

Treasury gave the following reasons for why it supports the move to a board/committee governance structure:

Note the use of the term board/committee. The difference may seem unimportant, but it is not.

There are two seperate but related issues.

  1. Should the RB Governor solely determine the OCR
  2. If a group should determine it, is the group appointed by the Reserve Bank or appointed by Ministers of the Crown?

There are pros and cons for the 1st issue. You may lose the ability to hold the Governor accountable if he (or she) is not the decision maker, but as Treasury has pointed out there is greater security in shared decision making.

But even if you accept (1), the details of (2) are vital.

To re-ignite this important debate publicly, I’ve drafted new law in the form of a member’s bill to make this simple, uncontroversial change to the Reserve Bank’s governance structure along with the timely publishing of board minutes – another standard practice elsewhere in the OECD that improves the transparency of the Reserve Bank’s decisions.

Dr Norman’s bill would see the Reserve Bank Board set the OCR. The Board are appointed by Cabinet, and his proposal would allow Ministers to appoint people to the Board with a view to lower the OCR, even if it is inflationary, to help the Government out with a short-term growth issue. It would weaken the independence that we currently have.

The Reserve Bank itself noted in a review that in most countries with decisions by committee, the members are mainly internal. Dr Norman’s bill would see the decision made by external people only.

Treasury in their advice say:

There are several ways to construct a Committee; we are focussing on just using senior RBNZ staff to form the Committee to deal with concerns about conflicts of interest and difficulties in finding many experts to serve on the Committee.

An internal bank committee is a very different beast to the RBNZ Board which is appointed by Ministers. The Greens have tried to gloss over this key difference and make it look like Treasury are in support of their bill – which isn’t quite the case.

Having said that if Dr Norman’s bill is drawn, I would support it going to select committee. The issues are worth a parliamentary debate. I can be persuaded in favour of change – but not if the committee responsible for the decisions is the RBNZ Board, as that would be inappropriate and reduce the independence of the Reserve Bank.


Reserve Bank decision making

October 3rd, 2013 at 2:00 pm by David Farrar

Hamish Rutherford at Stuff reports:

The Treasury lobbied for the governor of the Reserve Bank to be stripped of the right to solely decide on interest rate decisions, saying it created risk of “poor judgment”.

When Alan Bollard confirmed that he would stand down from the role last year, senior Treasury officials wrote to Finance Minister Bill English suggesting decisions on the official cash rate (OCR) should be made by a committee, rather than having the decision rest solely with the governor.

“Internationally it is usual to have a committee approach, with a range of possible committee structures,” senior analyst Renee Philip wrote last year, adding that the role of the Reserve Bank had broadened.

“The current single-decision-maker approach poses risks, such as a greater risk of poor judgment by a future governor than with a committee.

This is a worthwhile debate to have.

As I understand it, the Reserve Bank does have a committee that discusses the official cash rate settings, but it is advisory not decision making. One could have it as the official decision maker. It wouldn’t change the decisions, but would give some greater certainty. However it might reduce the accountability of the Governor, as he or she is the one who can be sacked if underlying inflation persist outside the agreed target range.

BNZ, Westpac, NZIER, Infometrics and Berl economists appeared to back the idea of a decision-making committee.

According to the Treasury, BNZ feedback was that a “committee internal to [the Reserve Bank] would ensure against risk of a future rogue governor”.

The Green Party said the advice of the Treasury aligned with its position.

No, it doesn’t. The Greens have said they want a committee to decide, but there is a key difference with Treasury advice. Treasury have said (and most international models are like this) that the committee should comprise senior staff of the Reserve Bank – ie be an internal committee.

The Greens want an external committee where they and/or sectoral interests such as unions, farmers and manufacturers have representatives on the committee. That has considerable danger.

The Solid energy failure

June 12th, 2013 at 11:00 am by David Farrar

Adam Bennett at NZ Herald reports:

Solid Energy withheld financial information from Treasury when challenged on its business plans in what an independent report says was a pattern of disrespect the company showed to officials monitoring its performance.

Treasury yesterday released a review by accounting firm Deloitte of its monitoring of Solid Energy which appears likely to be broken up and sold off after overextending itself and almost failing under the weight of $390 million in debt and low coal prices.

Deloitte said it did not believe “that the failure of Solid Energy has highlighted a material failure in Treasury’s monitoring processes”.

However, the report goes on to raise questions “whether Treasury’s response was forceful enough or occurred soon enough given that the company provided cause for concern over an extended period”.

Deloitte said several Treasury staff it interviewed “identified a sense of tension from the chair and chief executive particularly when challenged on more fundamental aspects of their business and strategy”.

The problem is that the sack the Board option is a very heavy step to take.

Deloitte was also given examples of the company’s “lack of respect for commercial expertise that set the scene for difficult interactions, particularly surrounding core issues with Solid Energy’s governance”.

The first written evidence of this was in April 2011 when a Treasury analyst requested financial information underpinning Solid Energy’s evaluation of one of its projects.

Deloitte understood Mr Palmer told Treasury the request was unprofessional and Solid Energy would not provide the information.

“Following robust disagreement from Treasury, the chair instructed the Solid Energy management team to provide the analysis. It is our understanding it was never provided.”

The Deloitte report comes just a few weeks after Treasury released documents showing Mr Palmer fought against Treasury’s wish to have an independent advisor appointed to the company’s board last year as the state owned coal miner’s problems mounted.

Deloitte’s report concludes that the removal of Mr Palmer and Dr Elder “may have been warranted.”

However it noted that for Treasury to initiate such action “would have required it to effectively form the view that it lacked confidence in a board and executive with a sound track record in a technically complex industry”.

Perhaps something needed for the future is an agreement between Board and share-holder, where they agree on what sort of information will be provided to Treasury on request. While the Board can be the only governing body, it is important Treasury has enough information so it can independently advise Ministers on the company’s performance and plans.

Treasury meet Santa Claus

December 23rd, 2012 at 1:00 pm by David Farrar

Sent to me by e-mail:

Subject: Update on Mr Claus – fyi


 The Treasury Secretary had an appointment last week marked Santa Claus. As is normal, Treasury staff provide a briefing note for all of his external meetings.

Briefing Note for Meeting

We see the Treasury Secretary plans to see Mr Claus next week. This note sets out some issues the Secretary should be aware of;

1) Economics. Mr Claus is very keen on distributing the effects of strong growth, but much less convincing on how we should meet the conditions for growth. For example, his freight proposals require extraordinary logistical management, right at the leading edge of the discipline. He would well advised to go down the drone route, as the US military has, than to continue with a manned aircraft. Multiple drones would go a long way to ensure success in his annual endeavour. The CAA advise us that the risks of airborne pollution from his existing craft are high, and could be dangerous to citizens.

 2) Social cohesion. Mr Claus has an unusual trait of using loud laughter to make a serious point as in “Merry Christmas Ho Ho Ho”. Some may misunderstand his penchant for having little children sit on his knee, but he’s passed all police checks with flying colours (and flying reindeer, which concerns Ministry for Primary Industries (MPI) and animal cruelty advocates).

 3) You might want to ask him why a one-horse open sleigh provides such enjoyment. MSD’s view is that it is a pretty dangerous activity, and MPI note that a horse pulling an open sleigh through snow would need considerable pastoral care. It is possible that it should be licensed under MoT’s planned regime for quad-bikes.

 4) Other jurisdictions have reliably informed us (pse protect) that Mr Claus has been discovered stuck in compromising positions in chimneys in foreign capitals.

 5) Given the possible disappearance of his current home, Mr Claus may be looking for your support on climate change initiatives. So far, of course, there is no compelling evidence that climate change has occurred, or if it has, that it is the fault of people like us. It’s just as likely that the enormous expansion of his manufacturing operation, required to deal with the growth in children numbers around the world, has led to the somewhat reduced ice coverage. So it’s all his fault, really. And what is he going to do about it?

 Mr Claus may want to provide a briefing on his proposed JV with the NZ Govt. Our understanding of what he might propose at present is as follows;

The GFC has had a serious impact on his Trust funds. The interest on these funds is what underpins his business model. The initial source of these Trust funds is murky ( to say the least).

He has had to re-engineer his business, to get greater efficiencies. So he has a jv with Apple, which can deliver music, books and games world-wide electronically.

As you know, the intelligence on whether children have been good or not has been a drain on all our intelligence activities, with Waihopai spending up to eighteen hours a day on this at peak times. Mr Claus proposes now to use social media, which will allow for major budget cuts in our Vote: Spooks.

Many toys are now supplied by China, and are much cheaper than those from traditional dwarves and elves. We have a relative over abundance of this race and with the finish of the filming of the Hobbit,we are concerned at the potential unemployment increase amongst this vulnerable section of society

The proposal he wants to put to the NZ govt is that NZ should be the base for Southern Hemisphere Claus Inc. This would lead to marked efficiencies in his operations, and would allow NZ to brand itself as Santa’s summer home with all the spinoffs that would provide. He evidently has a business case supplied by Warner Bros which shows a significant benefit to cost ratio.

 Views across Treasury are as follows :-

Economic Policy note that NZ already relies on hirsuite gentlemen and hobbits for its brand identity, and aren’t sure how Santa would fit into that. (Maybe a cross between Gandalf and Frodo?)

Tax policy think Claus’s business model is a classic in tax evasion (trust holding shares in a company which employs one of those providing the endowment) and could be the subject of international dispute.

Regulatory Quality note that there is no competition for Mr Claus, and NZ would in effect be supporting a multinational monopoly.

Commercial Monitoring has baggsed the first ride in the sleigh, given their new more active monitoring role.

Macro could see a small one-off positive impact on GDP, but note that this will be offset by changes in monetary conditions, so it should be ok, sort of, you know.

 The Chief Economist thinks that this idea is BEAUTIFUL (and we think he is beautiful too).

 Immigration note that we receive few migrants from the North Pole, and considerably fewer now that the Arctic is ice-free for some of the year. It would be helpful if Mr Claus could find support from local entrepreneurs. Toymakers are not at present on Immigration’s skilled shortage list.

 International think this could see NZ as a competitor for Singapore, with very large but seasonal trade flows.

 The accounting people think the JV would probably need to be a Crown Entity, and in any event, will require close monitoring.

 The Vote team think we’d probably need an appropriation, and a Minister for Claus.

 The Treaty team think we should celebrate Matariki, not Christmas, and bright red clothes are culturally inappropriate. Ministers strongly agree with this point. Better colours might be, oh, teal blue, or, say, Pacific blue.

 MPI aren’t keen on reindeer – HASNO issues – but could see sense in a team of sheep, with a fetching ewe in front of a team of stout Romneys. A couple of collies could help with navigation.

 TPK think a waka is more appropriate than a sleigh. It would certainly float better, in the event of a sheep-out.

 Our Corporate Centre partners are keen. SSC think the public service has a lot to learn from Mr Claus’s strong ethical foundations. DPMC can see clear and visible opportunities for a Minister for Claus, who would need to be a very senior Minister.

Talking points – express interest, note the proposal’s close fit with our living standards framework, and get a team together to look at a PPP.

 Have a great Christmas.

It uses all the correct jargon, so I suspect must be the work of a bored Treasury staffer!


Half Year Fiscal Update

December 18th, 2012 at 1:39 pm by David Farrar

The 2012 Half Year Economic and Fiscal Update has just come out. A couple of interesting graphs from Bill English’s presentation.


It is worth considering that the reduction in spending has occurred despite the Christchurch earthquakes. Spending at 35% of GDP is not sustainable, and in my opinion needs to get below 30%.



The turn about in household debt or savings is the reversal of a 15 year trend. It reflects the new world we are in.

Treasury on long-term fiscal challenges

December 12th, 2012 at 7:00 am by David Farrar

Girol Karacaoglu’s, Chief Economist to The Treasury, speech at the Affording Our Future Conference is a good and useful read.

So, assuming that the Crown’s tax revenue is kept as a stable ratio to GDP from 2020, and assuming existing legislative entitlements are kept unchanged, what this indicates is that the Crown would run growing budget deficits (negative operating balances) from 2030, increasingly driven by rising debt-financing costs (to pay the interest on the growing Crown debt levels that all these figures imply).

We know in reality that the above will never happen. Crown debt levels won’t be permitted to rise to above 100% or 200% of GDP.

Unless like the Greens you think you can just print money.

But it is interesting that it is around 2030, that things start to get tight.

As you can see, healthcare costs and retirement income policy are two significant drivers of the fiscal gap through the projection period. As indicated, two implications of Treasury’s projections are:

  • Publicly-financed health costs could rise from around 7% of national income or GDP in 2012, to around 11% by 2060;
  • Gross NZ Superannuation costs could rise from over 4% to 8% of GDP.

Another 8% of GDP would mean huge increases in taxation.

What do the numbers mean?

They mean there is no cause for panic.

They mean there is no crisis.

They mean that we have challenges ahead and they are manageable.

Future governments will manage them, just as governments have successfully managed the challenges of the last 20 years.

Treasury’s advice is that the most important and appropriate responses in the first instance is to have a strong and credible fiscal strategy for the short and medium-term.

Returning the Crown’s accounts to surplus and, reducing the Crown’s net debt levels down to a low level as a ratio to GDP over the next decade, is the prudent and sensible approach to protect the interests of New Zealanders now and in the future. The current Government is doing this.

From the mid to late 2020s, there will be many potential options that will be available to address the challenge. And these will be discussed over the next day and a half.

I agree we must get net debt down and that has to be the focus for the next decade. Just getting back into surplus by 2015 is only the beginning.

In terms of policy changes for the long-term challenges, I’d rather these started before the mid 2020s, as the longer lead in time we can give people, the more that can be done.


Treasury costs

December 5th, 2012 at 1:00 pm by David Farrar

Andrea Vance at Stuff reports:

Treasury’s spending on consultants is set to log a 1000 per cent increase over five years, figures reveal.

The Government’s economic adviser is meant to play a leading role in delivering cost savings as part of the Government’s Better Public Services policy.

But figures uncovered by Labour MP Chris Hipkins reveal its spending on contractors has soared since National took office.

Treasury shelled out $1.968 million on consultants in the 2007-08 year. It is expected to spend $21.927m in 2012-13 – up $19.959m, or 1014 per cent, which Mr Hipkins says is “gob-smacking”.

Sounds appalling, but wait there is a catch.

In this financial year $17m will be paid to consultants on the state-owned assets sale programme.

In other words a non business as normal expense. An expense related to a $5b sales programme. Comparing that to other years is classic apples and oranges.

What I focus on is the overall cost of Treasury. I’m not too fussed about how they split their spending between staff and consultants. You inevitably need both. What is more important is their overall level of “business as normal” expenditure. The Vote Finance Analysis says:

Baselines decrease by nearly $15 million in 2012/13 in comparison to the previous year due to:
• lower forecasted expenditure for the implementation of the mixed ownership model by $15 million
• removal of one off 2011/12 funded initiatives including Better Services for Less – Pipeline Funding of $3 million and and for work associated with accountability and funding arrangements to implement an
investment approach to the benefit system of $1 million
• reduction in funding of $2 million for the management and administration of Crown Guarantee Schemes, and
• a $2 million reduction for efficiency savings and the removal the Government subsidy for KiwiSaver and SSRSS employer contributions.

These baseline decreases are offset by:
• an increase of $5 million, attributable to the shared services for finance, human resources, information management and information technology being supplied to the Department of the Prime Minister and
Cabinet (DPMC) and the State Services Commission (SSC), and
• a transfer of efficiency savings of $1.500 million from 2011/12 to 2012/13 for banking tender and business improvements projects.

So not quite the out of control monster portrayed by Chippie.


Tax forecasts

May 22nd, 2012 at 7:00 am by David Farrar

One of the memes being pushed by Labour and the Greens is that the 2010 tax package wasn’t revenue neutral. They assert this because tax revenues are lower than was projected. The problem with their arguments is that tax revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the forecasts are imprecise.

As an example. Let’s say you forecast GST to be $12.5b at 12.5% and you increase GST to $15% and hence forecast GST will bring in $15b. That extra $2.5b of income is distributed back as income tax cuts. But let’s say once GST goes to 15%, the revenue only goes to $14b. Now Labour and the Greens are saying that $1b less is due to the policy change, and hence the tax switch was not fiscally neutral. They argue that it is purely because of the rise in GST that people spent less, and hence less GST was paid. But the drop in GST might just be because of lower economic growth, or a drop off in consumer confidence etc.

To give you an idea of how dramatically forecasts change over time, I’ve collated the forecasts from the last nine fiscal updates. They tell quite a story. Let’s start with total tax revenue.

The last two columns are best to focus on, as we get a full history. This is the total tax take projected for last financial year and the current one.

Back in the 2008 budget Dr Cullen projected $62.1b in tax revenue for 2011/12. Then by the PREFU it had dropped to $61.2b. It further dropped to $58.3b in the DEFU, which takes accounts of National’s election tax cuts. However those changes were compensated by expenditure reductions – mainly KiwiSaver.

A huge drop occurred between 2008 DEFU and the 2009 budget, with tax revenues dropping $4.3b! Now bare in mind it was in the 2009 budget National cancelled its planned tax cuts for April 2010 and April 2011, so it would have been an even bigger drop without that. This change was pretty much all due to the global financial crisis and recession.

By year end forecasts got more positive, going up to $56.6b, and then the tax switch in the 2010 budget projected it to go to $57.4b. However then forecasts dropped again, dropping to $56.7b and then $54.7b.

Now Labour and Greens say that the difference between 2010 Budget and the latest forecasts is all due to the tax switch. But as one can see over time the wider economy is a far bigger factor in tax projections. Recall how in 2009 tax revenues forecast dropped $4.3b even though National cancelled tax cuts.

Now let’s look just at GST.

This shows projected GST revenues only. Note how they from 2008 to 2009 they went from $13.5b down to $11.3b. Then they were projected in 2010 to go up to $15.8b with the increase to 15%. Just six months later Treasury revised that down to $14.0b, but then this year revised up to $15.0b.  This is still lower than originally forecast in 2010, but again no greater than other variances from year to year.

So when Labour and Greens say the tax switch cost $2b, they are making it up. What they are saying is that there has been $2b less tax revenue than projected. But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.

And for the paranoid out there, this is all my research, taken from going through the last nine fiscal updates. No one suggested it to me, helped me with it, or even knew about it. I did it because I got sick of the uncontested claims about the impact of the tax switch.

Income Mobility in New Zealand

May 11th, 2012 at 10:00 am by David Farrar

Treasury commissioned two public health researchers from Otago University to examine Stats NZ  longitudinal survey data on family incomes. The report from Otago University is here and an analysis by Treasury here.

I think income mobility is far far more important than income inequality. I do not think there is much merit in insisting that an untrained unskilled 18 year old should be earning the same as a 50 year old professional with 30 years of experience.

100 years ago in the United Kingdom there was little income mobility. Those families with wealth tended to keep it, and poor families stayed poor. I can understand the appeal of socialism 100 years ago. But today, while of course not perfect, there is greater income mobility. The knowledge economy especially means that land and capital are not as important as previously. More and more of the world’s billionaires and millionaires created their fortune, rather than inherited it. This graph from the analysis shows the situations in New Zealand over just a seven year period from 2002 to 2009.

So of the families who were in the bottom 10% of family income – in just seven years, 74% of them were no longer in the bottom decile. And only 46% of those in the top decile were still there seven years later.

By far the biggest characteristic indicating likely persistent deprivation is being a sole parent family.

Also of interest is that only a third of familes who spent the whole seven years on low income had been in deprivation at any point.

The Treasury’s conclusions:

  • Policy should emphasise mobility, deprivation and persistent low income
  • Policy should be designed with mobility in mind
  • Targeting policy effectively can be difficult
  • Solo parents are perhaps the group to be most concerned about

Income inequality is used by the left to argue for higher taxes and more welfare.  But as I said I do not accept that there is a problem that an 18 year old with no mortgage, no kids, no skills, no experience is paid less than someone with decades of experience. What we want is the ability for that 18 year old to get a job, to get education and training, to earn more over time and not spend a lengthy period of time (if any) in deprivation or hardship.

Some other stats:

  • Around 47% of families moved at least two income deciles over seven years
  • Over the seven years, 50% of families experience low income at least once
  • But 43% of those who had low income, only had it for one or two of the seven years
  • Sole parents are 12% of families but over 50% of those in persistent deprivation

This is one of the reasons why I think the welfare reforms are so important.

Go Treasury go

March 21st, 2012 at 9:42 am by David Farrar

John Hartevelt reports at Stuff:

More accountability for teachers and larger class sizes are again on the political agenda as Treasury Secretary Gabriel Makhlouf shapes up for a scrap with education unions.

He was urged yesterday by a teachers’ union, the New Zealand Educational Institute, to “stick to his knitting” after he went on the offensive, saying it was the quality of teachers that made the greatest difference to student achievement.

Here’s what’s funny. I would have thought a teachers’ union would absolutely agree that the quality of teachers makes the greatest difference to student achievement. They should be proud of the fact, and trumpeting it about how important teachers are.

Research suggested the impact on student learning of a “high-performing teacher” compared with an average teacher was “roughly equivalent” to the effect of a 10-student decrease in class size, Mr Makhlouf said.

So a good teacher with a 30 person class will be as effective as an average teacher with a 20 person class.

He suggested “a number of ways” to assess teacher quality, including in-class observations by other teachers, direct observations by principals, and feedback from students and parents.

At almost every school, students and staff know who are the most and least effective teachers. I certainly knew as a student at Rongotai College. Mr Jackson, Mr Reid, Mr Wilson were all great teachers, and all their students talked about how great they were.

A boost in class sizes of one or two students per classroom could free cash to invest more in quality teachers, he said.

Until we are out of deficit mode, extra funding is limited. So yes I agree investing more in quality teachers is more important than class sizes (within reason).

The retail deposit scheme

October 5th, 2011 at 10:00 am by David Farrar

Vernon Small at Stuff reports:

Treasury failed to stem the flow of millions of dollars into risky finance companies, including failed South Canterbury Finance, after the Government guaranteed their deposits, a report highly critical of the management of the scheme reveals.

The report, by Auditor-General Lyn Provost, reveals deposits in South Canterbury Finance jumped 25 per cent and another finance company saw more than $7million flow into its coffers as investors chased higher returns once they realised the Government was there to pick up the tab when riskier finance companies fell over.

Ms Provost says Treasury knew from the start that depositors would chase the guarantee and that that carried significant risk, but did not take sufficient steps to minimise that risk.

“We saw one example where a finance company’s deposits grew from $800,000 to $8.3 million after its deposits were guaranteed. At South Canterbury Finance Limited, the deposits grew by 25 per cent after the guarantee was put in place,” the report found.

“Once deposits with these companies were guaranteed, depositors could safely move investments to where they would get the highest return, irrespective of the risk of company failure. The finance companies also had less reason to minimise risk in their investment activity. The Crown was carrying much of this risk.”

From mid-2009, Treasury was closely monitoring these changes and the companies that were identified as being at risk.

“However, it was largely doing so to prepare for potential payouts. It did not see itself as able to interact with a finance company to attempt to moderate that behaviour, even when it could see the Crown’s potential liability increasing markedly. The view appeared to be that it was better to recover what funds it could after an institution failed, than try to influence events before a failure.”

So the criticism is that having guaranteed the deposits, Treasury should have told some finance companies to pull their heads in, presumably with an implicit threat to revoke the guarantee if they don’t.

Treasury Secretary Gabriel Makhlouf said yesterday that Treasury disagreed with the assertion that more intervention in finance companies might have reduced the fiscal risks that were an inevitable consequence of the scheme.

I suspect it would have reduced the fiscal risks. However it may have increased other risks such as reputational risks. If Treasury was acting as a sort of implicit director of a finance company and it then crashed, the company might blame Treasury for interfering and say that without the interference they would have been fine.

Not pricey

April 12th, 2011 at 9:11 am by David Farrar

The Herald reports:

Treasury boss John Whitehead took World Bank and International Monetary Fund officials out for pricey dinners just a few months after State Service Commissioner Iain Rennie warned top public servants against doing just that.

Dr Whitehead’s credit card expenses were published this week and show that last month he spent $292 on dinner for three at Wellington waterfront eatery Foxglove with World Bank executive director Jim Hagan.

I’m sorry but this is almost embarrassing. I’m all for responsible use of credit cards, but running a story about spending $95/head at dinner entertaining the Executive Director of the World Bank is ridicolous.

Foxglove is a medium priced restaurant. Far from the most expensive. Should we take the World Bank Executive Director to Uncle Chang’s instead?

Or alternatively have him out for dinner, and then when you get to desserts, tell him “I’m sorry but NZ is so poor, we can’t pay for dessert”.

$95 doesn’t mean there were bottles of expensive wine drunk. $20 for an entree, $40 for a man and $15 for a dessert is $75 so  arguably they had one bottle of $60 wine. I doubt the World Bank executive Dinner is going to regale colleagues in Washington about the awesome night out in Wellington – yeah we had five courses, two bottles of port plus a couple of strippers – all for $95 – it was better than Vegas.

It is good to have scrutiny of public sector spending. In fact I support having all Government payments listed online. But I don’t regard $95/head for the Executive Director of the World Bank as inappropriate or even newsworthy.

Treasury’s welfare prescription

October 5th, 2010 at 10:31 am by David Farrar

The Herald reports Treasury recommends:

  • Move work-ready people from sickness and invalid benefits on to dole.
  • Make sole parents look for paid work before youngest child turns 6.
  • Contract out welfare services to private companies and charities.
  • Increase sick leave and parental leave to give employers incentives to help workers back to work.

This will give Sue Bradford something to scream about.

I’m hesitant over the work testing when the children are under six, but the other stuff looks pretty sound.

It draws heavily on recent reforms in Australia and Britain, which have both moved work-ready people off disability benefits on to the unemployment benefit. In Britain, the paper says, 69 per cent of previous disability beneficiaries were classified as “fit for work” and moved on to the dole.

“On the basis of the recent UK reforms, the reclassification of all sickness and invalid beneficiaries could result in more than 80,000 New Zealand beneficiaries moving on to the unemployment benefit,” it says.

The principle is very sound, and the UK has shown the potential. I do want to make the point that many who are on the Invalids Benefit are quite literally unable to work, through no fault of their own. They deserve as much support as possible. But there certainly are some on there, who are work capable.

France, Germany, Switzerland and Norway all require sole parents to look for work when their youngest children turn 3, and some countries treat sole parents the same as any other unemployed person regardless of the children’s ages.

One could lower the age from six to five, but I’d rather not go below that.

The paper says Australia’s decision to contract out job search services for the unemployed to private companies and charities in 1998 halved the cost for every job placement from A$12,000 to A$6000.


Robertson on Treasury

September 2nd, 2010 at 6:29 am by David Farrar

The Herald reports:

Three non-executive directors have been appointed to the Treasury’s board, but Labour is continuing to question the reason for the board’s existence.

Treasury Secretary John Whitehead, who announced the governance board last month, said it would include private and community representatives to provide advice.

Mr Whitehead would be able to veto the board’s advice.

He said he would continue to answer to the State Services Commission and Finance Minister.

I think this is a good initiative. It may stop Treasury getting too insular, and provide some external views on how Treasury are doing.

Labour’s state services spokesman Grant Robertson said the board challenged the neutrality of the public service and public service bosses’ responsibility to ministers.

With various working groups, purchase advisers, a review of public sector advice and now a board for the Treasury, the Government was fundamentally changing the nature of the public sector, he said.

“This board looks designed to lock in place the economic thinking of the current Government.

Oh what tosh. I should remind people that Mr Whitehead was appointed to his role in 2003 under a Labour Government, and incidentally one of his former jobs was Deputy Director of the Labour Parliamentary Research Unit.

Treasury thinks of everything

May 15th, 2010 at 2:23 pm by David Farrar

Treasury have just sent the conditions of the budget lockup. I loved this one:

In the unlikely event that the building has to be evacuated because of a fire alarm or some other emergency prior to 2.00pm, the embargo will be lifted immediately.  However please note that in such a situation it would be expected that you evacuate without delay for your own safety, rather than attempting to file from within the building.

I’ve got a wonderful visual image of media and analysts fleeing a burning Beehive while trying to file their stories.

Treasury looks long term

February 1st, 2010 at 12:00 pm by David Farrar

Treasury has done a working paper on our long term fiscal issues. They construct two main fiscal scenarios – a historic trends scenario that uses historic and current settings to interact with changing demography and a sustainable debt scenario that applies a fiscal constraint on non-benefit spending so that Crown net debt stays within the medium-term fiscal target.

I should say from the start, I am a fan of keeping net debt down!

Under the historic trends scenario, net debt reaches 225% of GDP by 2050. The sustainable debt scenario has it at 20% of GDP by 2050.

I won’t go into all the facts and figures but a key message I took from it, is that if we have a high level of fiscal restraint for the next 10 – 12 years, then it becomes easier to keep net debt down over the long term. This means stuff like health spending only increasing by 3% a year.

Superannuation is a big part of the mix also. I’m going to do some dedicated posts on this issue over the next few weeks.

Treasury Staff

February 1st, 2010 at 5:55 am by David Farrar

The Herald reports:

Treasury Secretary John Whitehead rejects the suggestion that he employs a bunch of bookish, chin-stroking, policy eggheads who sit around dreaming up economic miseries.

I’m sure sometimes they do it standing up. 🙂

The Treasury family were a diverse and well-rounded lot. The Treasury had recently employed a former Presbyterian minister and someone who featured on television talking about a nudist camp they had set up.

Oh dear – is this meant to increase confidence in the fiscal forecasting – that Treasurys employs former priests and nudists!

Still the nudist might liven up casual Fridays 🙂

Go Treasury Go

October 8th, 2009 at 2:27 pm by David Farrar

The Herald reports:

Bold tax reforms and changes to the mix of monetary and fiscal policy are needed if New Zealand is to rebalance its economy and close the gap with Australia, according to the Treasury’s head.

New Zealand needs to overhaul its tax system, bringing down income tax and potentially increasing GST or imposing a land tax, Treasury Secretary John Whitehead told a business audience in Queenstown last month.

I agree.