The Reserve Bank is running out of ammo to support jobs growth. Now economists say the Government should use its ample stockpile of surpluses to help. Marc Daalder reports.

With business confidence down, unemployment expected to rise and the Reserve Bank likely to cut interest rates another 25 points later this week, some economists are asking whether it’s time for the Government to step in ahead of economic slowdown. 

The global economy is slowing and New Zealand is not immune. On Tuesday, Stats NZ will release their latest report on the labour market. Unemployment is expected to have risen and, while wage growth may see a bump due to the minimum wage increase in April, the figure is still expected to have remained stagnant year-on-year.

Then comes Wednesday’s Monetary Policy Statement and accompanying Official Cash Rate decision from the Reserve Bank. RBNZ is forecast to cut interest rates another 0.25 percent, down to 1.25 percent. More cuts after that are also expected, as the central bank struggles to stimulate a slowing economy.

“…with each additional lowering of the official cash rate, you just get less economy punch.”

RBNZ is faced with a tough nut to crack, however.

“Monetary policy is, broadly speaking, getting less effective,” said Brad Olsen, a senior economist with Infometrics. “You haven’t seen that pass-through coming through with the OCR cut we had in May.”

Interest rates were cut 25 basis points in May, the first such change in two and a half years, but the floating mortgage rate has only dropped 12 basis points in response. In other words, the economy is experiencing diminishing returns on OCR cuts.

Olsen believes the Government should now step in and supplement RBNZ’s efforts – and he’s not alone. Kiwibank’s Chief Economist Jarrod Kerr and the current and former economy heads at ANZ Sharon Zollner and Cameron Bagrie respectively, all worry about the efficacy of tinkering with the OCR.

“Monetary policy is playing its part but the transmission mechanism is being diluted by the fact that with each additional lowering of the official cash rate, you just get less economy punch,” Bagrie said.

“The economy at the moment needs fiscal stimulus because it’s pretty clear it’s decelerating and not accelerating,” he added.

“Monetary policy globally is tapped out and New Zealand is heading the same way,” Zollner said. “The argument for fiscal policy stepping up is becoming pretty clear.”

Kerr agrees. “The Government has the ability to do things that the private sector doesn’t. It can step in and think across council lines and do the big projects that need to be done. We’ve got a significant infrastructure deficit in this country and it’s in desperate need of attention and investments.”

While the Government is widely expected to devote a chunk of next year’s Budget to stimulating the economy, Olsen worries that May 2020 might not be early enough.

“Could it be done sooner? Yes. Does it need to be done sooner? Most likely,” he said.

He wants to see the Government fund council infrastructure plans right away.

“They know with their local communities what’s likely to be needed over the next wee while. If central government wants to get some action underway and some money out the door, it might be worth them saying to local government, ‘Look, we’ve got a pot of cash, what do you want to pitch for that can actually get underway?’”

Paul Goldsmith, the National Party’s spokesperson for finance, said the slowdown couldn’t be averted with spending alone. “They have already put a bit of a fiscal stimulus in, in the sense that they’ve increased spending quite substantially,” he said of the Government. “Our point would be: the problem is that it’s been pretty poor quality.”

Alongside that, Goldsmith said: “Infrastructure spending in particular is in danger of falling into a bit of a hole.”

All this comes alongside a third problem, which he identifies as the Government’s greatest challenge: business confidence.

“The Government’s broader economic policy which is undermining confidence so much is probably a bigger deal than any fiscal stimulus. Rather than ramping up even more fiscal stimulus, I think they’d be far better to get decent returns from the money you’re already spending, do something on infrastructure, and address the things driving down business confidence,” he said.

Despite this criticism and the slowing economy, the Government has declined to announce any more urgent plans to address the situation. 

Prime Minister Jacinda Ardern defended the Government’s current record, saying, “I’d say we’re already … putting more stimulus into the economy through central government spending. Look at, for instance, our spend in the last budget relative to 2018, which went from $2.4 to $3.8 billion dollars. Look at the increase in people’s pay – nurses, teachers – and the knock-on effect of that.

“We’ve also invested in infrastructure. Now there are certain limits to how quickly the benefit of that infrastructure investment will be felt. I think we’re pushing, probably realistically, as hard as we can.”

However, Treasury tells a different story. According to the fiscal update released alongside the 2019 Budget, the Government’s fiscal policy only had a stimulating effect on the economy in the now-ended 2018/2019 fiscal year. For 2019/2020, it will have no impact, and then will actively contract on the economy for the three years thereafter.

Figure 2.9 – Operating balance indicators and fiscal impulse. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Treasury also reports the Government ran a $6.96 billion surplus in the 11 months to May 31 and that net debt has already fallen to 19.3 percent of GDP three years earlier than Labour  promised in the run-up to last election.

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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