Is Nicola Willis in danger of doing a 'Liz Truss'?
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Out-of-date inflation figures?
Q: Hi Liam,
Why do you, banks and the Reserve Bank look all the way back to 1/4/23, and add in the June and September 23 quarters. These are so out of date. You are saying inflation is still around 4 per cent annually, but that is heavily influenced from April 23 to Sept 23, and the more recent inflation is nowhere near that level. From your article, it seemed like March 2024 quarter is expected to be around 0.8 per cent, December quarter was 0.5 per cent. So for six months that will be 1.3 per cent, or annualised 2.6 per cent.
Has someone tried pushing back on the RBNZ, and explaining that the annual formula isn’t really showing the real or up-to-date picture? - Ross Barnett
A: Great question Ross.
I made a similar point myself in my Sunday column earlier this year - although I admit I do go along with standard practice in my day-to-day reporting.
But yes, surely the inflation we are experiencing right now in the economy is the relevant bit. So why do we look so far back with data to decide whether we are in the official 1-3 per cent target band?
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There’s convention, I suppose. It would be difficult for New Zealand to run monetary policy that’s wildly divergent from our (larger) international peers. The backward-looking annual inflation approach is commonly used in advanced economies like Australia, the US and the UK.
But the Reserve Bank of New Zealand (RBNZ) also points out that they do look at inflation data more holistically than it might seem at first glance.
Here’s their official response to the question:
“The RBNZ bases monetary policy decisions on the outlook for inflation over the medium term. We take into account a range of the most timely information available, including quarterly inflation data, to form a view on what OCR settings are necessary to return inflation to our target. Although we often report headline inflation figures in annual terms (because our remit is specified as an annual inflation target, annual numbers tend to be more easily understood, and quarterly figures can be driven by volatility and seasonal price movements), we closely examine high-frequency movements in key economic data series such as CPI inflation, and make judgments about whether recent movements will be sustained.”
Why so slow?
Okay, we aren’t going to get the RBNZ to change its policy any time soon. But why can’t we get our CPI data every month like they do in the US?
Last week KiwiBank economists poured cold water on market expectations for a rate cut in August, pointing out that the RBNZ will have only two more full sets of CPI data by then (including today’s).
“We think they need to see inflation below 3 per cent before they will contemplate cuts. And the earliest that will happen is October, when the [third quarter] inflation report is published. So that means the first reasonable chance of a rate cut is November,” Kiwibank said.
When you consider how costly any potential delay to interest rate cuts is for our economy, surely it makes sense to be getting this data every month.
I’m not having a go at Stats NZ, which I think does a fantastic job of gathering a wealth of data on all aspects of New Zealand life.
I have put that question to StatsNZ (and will run the response when it arrives) but I suspect the answer is funding and resources. On that basis, I’d love to see the Government specifically target funding to deliver monthly CPI data.
The payoff in this current cycle would be lower rates sooner. But of course, it might also have provided insight to have lifted rates sooner keeping inflation down in the first place.
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Value for money, I reckon.
Is Nicola Willis in danger of doing a ‘Liz Truss’?
A plan to borrow for tax cuts turned out to be a career-ending move for short-lived British PM Liz Truss. Is our own Government about to attempt the same thing?
It depends on who you talk to. Finance Minister Nicola Willis says they are not. But economists see it differently, writes Business Herald Wellington editor Jenée Tibshraeny .
“The crux of the disagreement hinges on whether it’s fair to ring-fence one type of spending - ie, on tax cuts - and say any savings or new types of revenue are used specifically to cover that cost, all the while other types of new spending are at least partially debt-funded,” Tibshraeny writes.
The article quotes independent economist Cameron Bagrie, who says Willis’ argument “doesn’t stack up”.
Actually, I’m yet to read of any economist who thinks it does (feel free to get in touch if you do).
“It’s the same pool of money,” economist Shamubeel Eaqub told TVNZ.
Eric Crampton , chief economist at the pro-free-market think tank The New Zealand Initiative , has also expressed his scepticism and concern.
“The Budget Policy Statement claims that any tax reduction would not add to debt because reprioritisation, savings, and new revenue measures would fund it. But debt would be lower and the path to surplus would be faster if tax reductions were deferred until spending cuts provided room for them,” Crampton said.
“The bill for a longer period of larger deficits will come due.”
Despite claiming that the cuts would turbo-charge economic growth and pay for themselves, Truss was undone in 2022 by financial markets which took a dim view of her plans. The British pound and bond prices plunged, and the cost of borrowing rose. Truss sacked her Finance Minister Kwasi Kwarteng before resigning herself.
“I think it’s clear you can’t fund tax cuts through increased borrowing,” new UK Finance Minister Jeremy Hunt subsequently said.
The debacle is a reminder that it isn’t politicians or economists who’ll deliver the final verdict on National’s tax cut policy - it’s markets.
Unlike Truss and Kwarteng, I think PM Christopher Luxon and Willis will be likely to get away with their tax plan simply because it is much less ambitious in scale.
Graph of the week
Stats NZ has released the latest productivity statistics for (the year to March 2023). They weren’t flash. Labour productivity went backwards by 0.9 per cent. In other words, we produced 0.9 per cent less output for the same hours worked. It was the largest fall since 2009 and followed a rise of 1 per cent in the year ended March 2022.
Partner at Connell & Connell
7 个月Hi Liam I suggest to you this is a sexist piece of rubbish you need to reflect before you write . Nicola Willis bears no resemblance to Liz Truss except that she is a female and therefore can’t be competent in such matters Is that the point you are making ? The reality is she is a very intelligent measured diligent person who works with others as a team player ,how can she have anything in common with Liz ?