Has Labour Abandoned The Welfare State They Created In 1938?

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The 2018 Social Security Act suggests that Labour may have retreated to the minimalist (neo-liberal) welfare state which has developed out of the Richardson-Shipley ‘redesign’.

One wonders what Michael Joseph Savage, Peter Fraser and Walter Nash would have thought of the Social Security Act passed by the Ardern Labour Government in 2018. Its principles were set out as

Every person performing or exercising a duty, function, or power under this Act must have regard to the following general principles:

(a) work in paid employment offers the best opportunity for people to achieve social and economic well-being:

(b) the priority for people of working age should be to find and retain work:

(c) people for whom work may not currently be an appropriate outcome should be assisted to prepare for work in the future and develop employment-focused skills:

(d) people for whom work is not appropriate should be supported in accordance with this Act.

This has a quite different focus from the act Labour passed in 1938 which began:

An act to provide for the payment of superannuation benefits and of other benefits designed to safeguard the people of New Zealand from disabilities arising from age, sickness, widowhood, orphanhood, unemployment, or other exceptional conditions; (I have omitted the provisions for healthcare).

There is a redirection in the purpose of the system described by the 2018 Act from safeguarding those with disability to prioritising paid work as the social norm.

Eighty years ago, statutes did not include general principles. The 1972 (McCarthy) Royal Commission on Social Security codified the principles of the existing social security system, the first of which was:

The community is responsible for giving dependent people a standard of living consistent with human dignity and approaching that enjoyed by the majority, irrespective of the cause of dependency. We believe, further, that the community responsibility should be discharged in a way which does not stifle personal initiative, nor unduly hinder anyone trying to preserve or even enhance living standards on retirement or during times of temporary disability.

I can find no such sentiment in the 2018 Act, which is in many ways a manual for those administering a very different system. (It is over five times as long as the 1938 Act which also covered retirement and health benefits.)

Admittedly things have changed since the 1972 Royal Commission, including higher evident unemployment and women are more likely to be in the paid workforce. (The changes are detailed in my Not in Narrow Seas, Chapter 39.) However, that is not a justification for abandoning the principles which Savage, Fraser and Nash would have applauded. Rather, the challenge was to apply those principles to the new circumstances.

Governments since the 1972 Royal Commission have largely abandoned the challenge. Indeed the Richardson-Shipley ‘redesign of the welfare state’ replaced the 1938 approach with a minimalist neoliberal one of an American-style welfare state instead of the more European social democratic approach which the Royal Commission accepted and where once New Zealand led the world as Lord Beveridge (of the British Beveridge Report – the foundation of their welfare state) once acknowledged. 

And so the prioritisation of work as the foundation of social security followed. It was the Clark-Cullen Labour Government which introduced the work focus into the Social Security Act in 2007. It was applied by Minister Paula Bennett under the Key-English National Government.  

The 2018 Act itself was enacted by a Labour Government (minister Carmel Sepoloni) in effect endorsing the 1990 redesign of the welfare state and abandoning the system which Labour was once so proud. Yes, the Ardern-Hipkins Government administered the system more generously and fiddled around at its edges but it adopted the underlying framework, just as in 1949 the first Holland-Holyoake National Government adopted the preceding Labour Government’s 1938 framework. (When the statute was being passed in 1938, Sid Holland had described it as ‘applied lunacy’ responding to Savage’s ‘applied Christianity’ – I suppose Christianity is out of fashion today.)

So the Arden-Hipkins Government and its advisers  accepted the neo-liberal framework. Was that by default because they had no alternative? One acknowledges that their proposed Social Unemployment Insurance scheme was a more European-style approach to welfare. Its critics included advisers to Labour’s social welfare minister and it was abandoned by the Hipkins ‘policy bonfire’ of February 2023. (My objection was that it was poorly articulated with the existing social security system; a proper articulation would have shifted the system away from the minimalist welfare state approach. I was told those implementing the scheme thought the challenge of the integration was too great.)

This is but one example of the reluctance of the Ardern-Hipkins Labour Government to challenge the neoliberal framework it inherited (although it did in some areas). Given that the 1938 Social Security Act is usually seen as one of the greatest achievements by any New Zealand Labour Government, the reluctance illustrates how far Labour has shifted in the eighty-odd years. Savage, Fraser, Nash and a host of their colleagues must be wondering what has gone on.

The Principles of the Treaty; An Exploration

This entry was posted in Maori, Political Economy & History on by .

This was written to clarify m y think, and has been shared around. May 2024 version)

The background to this note is that by early 2024 the ‘principles of the treaty’ (i.e. Te Tiriti o Waitangi) was a political hotpoint. The most public was ACT’s proposal to have a referendum on the treaty principles.[1] The paper concludes that the treaty principles (with one exception which is explained below) restrain the New Zealand Government in its treatment of a particular minority (Māori), but that those restraints apply equally to all minorities in a liberal democracy including the minority of one person – everyone. All they do is make the restraints more explicit for Māori.

The Treaty of Waitangi Act 1975

Treaty principles were introduced into the governance of New Zealand by the Treaty of Waitangi Act 1975 whose purpose was

‘to provide for the observance, and confirmation, of the principles of the Treaty of Waitangi by establishing a Tribunal to make recommendations on claims relating to the practical application of the Treaty and to determine whether certain matters are inconsistent with the principles of the Treaty.’

The Act’s preamble goes on that ‘a Tribunal be established to make recommendations on claims relating to the practical application of the principles of the Treaty and, for that purpose, to determine its meaning and effect and whether certain matters are inconsistent with those principles.’ However, the act did not state what those principles were. Subsequently, various other statutes have references to the principles – again without defining them.

The Court of Appeal

The inclusion of the principles in the State-Owned Enterprises Act 1986 led to a Court of Appeal case New Zealand Māori Council v Attorney-General (1987) (a.k.a. the ‘Lands’ case or the ‘SOE’ case). It forced the Court to define the treaty principles. The judgements do not codified their principles, but a common summary (numbered here for future reference) of their deliberations is:

‘1CA The Crown has the right to govern. The principles of the treaty ‘do not authorise unreasonable restrictions on the right of a duly elected government to follow its chosen policy. Indeed, to try and shackle the Government unreasonably would itself be inconsistent with those principles’.

‘2CA The Crown has a duty to act reasonably and in good faith. The relationship is ‘akin to partnership between the Crown and Māori people, and of its obligation on each side to act in good faith.’ The judgment draws parallels with ‘our partnership laws’.

‘3CA   Active Crown has a duty to protect Māori interests. ‘The duty of the Crown was not just passive but extended to active protection of Māori people in the use of their lands and waters ‘to the fullest extent practicable.’

‘4CA The government should make informed decisions. The Court said that in order to act reasonably and in good faith, the government must make sure it was informed in making decisions relating to the treaty. That will ‘require some consultation’.

‘5CA The Crown should remedy past grievances. ‘If the Waitangi Tribunal finds merit in a claim and recommends redress, the Crown should grant at least some form of redress, unless there are grounds justifying a reasonable Treaty partner in withholding it – which would be only in very special circumstances, if ever.’[2]

Since 1987, other court cases have developed the application of the principles. For instance, active protection of Māori people now extends to other taonga such as te reo. It seems likely that the courts would also recognise kaitiakitanga – guardianship of the environment – rights, even if they were not in statute. Additionally, court decisions have protected Māori property rights. (They are implicit in the Court’s third and fifth principles.)

The New Zealand Government Principles

The New Zealand government set out principles in 1989 to guide its actions on matters relating to the treaty. No subsequent government has modified them, thereby implicitly endorsing them. They were:

‘6NZG The government has the right to govern and make laws. (The kāwanatanga principle)

‘7NZG Iwi have the right to organise as iwi, and, under the law, to control their resources as their own. (The rangatiratanga principle)

‘8NZG All New Zealanders are equal before the law.

‘9NZG Both the government and iwi are obliged to accord each other reasonable cooperation on major issues of common concern.

‘10NZG The government is responsible for providing effective processes for the resolution of grievances in the expectation that reconciliation can occur.’[3]

The Waitangi Tribunal

The 1975 legislation establishing the Waitangi Tribunal charged it with applying the principles without stating what they were. Presumably the intention was that the Tribunal would identify them. The Tribunal has described in detail its approach in Principles of the Treaty of Waitangi. In summary:

‘11WT The principle of partnership. ‘The Court of Appeal has referred to the Treaty relationship as “akin to a partnership”, and therefore uses the concept as an analogy, emphasizing a duty on the parties to act reasonably, honourably, and in good faith. The Waitangi Tribunal has also emphasized the obligation on both parties to act reasonably, honourably, and in good faith, but derives these duties from the principle of reciprocity and the principle of mutual benefit.’

‘12WT The principle of reciprocity. ‘The Waitangi Tribunal’s understanding of the principle of reciprocity is derived from Articles I and II of the Treaty and captures the “essential bargain” or “solemn exchange” agreed to in the Treaty by Māori and the Crown: the exchange of sovereignty for the guarantee of tino rangatiratanga.’

‘13WT The principle of mutual benefit. ‘The Tribunal has found that the principle of mutual benefit or mutual advantage is a cornerstone of the Treaty partnership. An underlying premise is that both partners signed the Treaty expecting to benefit from the arrangement. This principle requires that “the needs of both cultures must be provided for and compromise may be needed in some cases to achieve this objective”.’

‘14WT The duty to act reasonably, honourably, and in good faith. ‘The Treaty signifies a partnership between the Crown and Māori people and the compact rests on the premise that each partner will act reasonably and in utmost good faith towards the other.’

‘15WT The duty to make informed decisions. ‘The Courts have found that it is inherent in the Crown’s obligation to act in good faith that it is obliged to make informed decisions on matters affecting the interests of Māori.’

‘16WT The principle of active protection. ‘The principle encompasses the Crown’s obligation to take positive steps to ensure that Māori interests are protected. The Courts have considered the principle primarily in association with the property interests guaranteed to Māori in Article II of the Treaty.’

‘17WT The principle of redress. ‘The Court of Appeal has acknowledged that it is a principle of partnership generally, and of the Treaty relationship in particular, that past wrongs give rise to a right of redress.’[4]

It will be evident that the Tribunal’s principles primarily derive from decisions by the courts. However, the courts may not necessarily agree with the Tribunal’s interpretation of the application of those principles. (The Tribunal is not a court and its findings do not have the standing of a court unless a court endorses them. On the other hand, the Tribunal must respect court decisions and legislation.)

Te Puni Kōkiri

Te Puni Kōkiri’s He Tirohanga ō Kawa ki te Tiriti o Waitangi: A Guide to the Principles of the Treaty of Waitangi as expressed by the Courts and the Waitangi Tribunal identified the following principles:

The principle of partnership (11WT);

The principle of reciprocity (12WT);

The principle of mutual benefit (13WT);

The duty to act reasonably, honourably and in good faith (14WT, 2CA);

The duty to make informed decisions (15WT, 4CA);

The principle of active protection (16WT, 3CA);

            The principle of redress (17WT).[5]

They are the same principles as the Waitangi Tribunal.

A Thought Experiment

Rather than provide a consolidation or synthesis of the above principles, consider the following thought experiment. Suppose every Māori was to disappear from New Zealand (perhaps a virus wiped out everyone with a Māori gene). Which of the principles would be abandoned or become redundant, assuming that they apply to all New Zealanders? After all, it can be argued that Article 3 of Te Tiriti applies to all New Zealanders. [6]

Surprisingly – at least to me – virtually ever principle is intrinsic to the governance of a liberal democracy. Their effect is to restrain the New Zealand Government in its treatment of a particular minority (Māori). In a liberal democracy those restraints apply equally to all minorities– including the minority of one person. They are generally not platitudes; many hardly apply in Putin’s Russia.

So, even were there no Māori, the government would still have the right to govern. (1CA, 6NZG). It would still have duty to act reasonably and in good faith (2CA, 11WT, 14WT[7]), to make informed decisions (4CA, 15WT) and to remedy past grievances (5CA, 10NZG, 17WT). All New Zealanders would remain equal before the law (8NZG).

The Tribunal principles of reciprocity (12WT) and mutual benefit (13WT) also fit into this liberal democratic framework, although that requires a little more finesse. I am not providing it here, because I would use a social contract approach but other social democrats could take a different approach to reach a similar conclusion.

Do Iwi Have Special Status?

With no living Māori, the other principles that the Crown has an active duty to protect Māori interests becomes redundant in the thought experiment. (3CA, 16WT) But the Crown surely has an equal duty to protect the interests of individual non-Māori.

However while they can be interpreted as applying to all New Zealanders not just conferring a special right to those of Māori descent, the same conclusion does not apply to‘Iwi’. (Iwi is capitalised to indicate ‘tribes’ rather than people; hapu are included.)

Do the following principles apply in similar ways to other voluntary organisations in a social democracy?

3CA ‘The duty of the Crown was not just passive but extended to active protection of Māori people in the use of their lands and waters to the fullest extent practicable.’

7NZG ‘Iwi have the right to organise as iwi, and, under the law, to control their resources as their own.’

16WT ‘The principle encompasses the Crown’s obligation to take positive steps to ensure that Māori interests are protected.’ (This combines the two and need not be considered separately.)

So perhaps Iwi are special. For instance, the Government’s Employment Contract Act 1991 deliberately undermined trade unions. No one questioned the right of Parliament to pass such legislation, although many questioned whether it should do so. Doing the same thing to Iwi would undermine a treaty principle. Similarly other organisations at a similar level in the political/social structure, including churches and local authorities, have no such guarantees. Perhaps key to the difference is that Iwi existed as political/social entities before the arrival of the New Zealand Government in 1840. All the others came after.

This gives a special status to Iwi. The Government has a particular responsibility to listen to their concerns. However, as the Court of Appeal ruled, that does not give Iwi a veto. (1CA) Principle 7NZG also suggests that the Government has a duty to ensure strong viable Iwi. That may be a reason that the treaty settlements were made with Iwi rather than with individual Māori.

What is unclear is the extent of the obligation on the Government to support a failing Iwi. It seems likely that were an Iwi’s rohe devastated by, say, an earthquake or volcano there would be a special obligation towards restoring the Iwi in the post-disaster reconstruction. But suppose the Iwi failed financially through mismanagement?

We also need to ponder what exactly an Iwi is. The distinction between Iwi and hapu was fluid in 1840, and varied by region. The Government has tended to treat hapu as Iwi in terms of treaty settlements. Moreover, new forms of Māori organisation – such as Urban Māori Authorities and the Māori Women’s Welfare League – may amount to modern Iwi. At the heart of such issues is the principle – not mentioned as a treaty one but fundamental to a modern social democratic state – of the right to Māori and others to develop.[8]

In summary, the Treaty Principles do not seem to give individual Māori any particular rights that everyone in a social democracy does not have. However, the principles seem to give special rights to Māori organisations such as Iwi, but they are limited; that does not give those organisations a veto in the governance of New Zealand.

Co-Governance

It is useful to distinguish between self-government, partnership, co-management and co-governance.

The self-government of Iwi is mentioned explicitly or implicitly in a number of treaty principles (especially 7NZG) arising from the second article of Te Tiriti. It is argued that self-government may be weakened by co-governance, although that depends on what the latter means which, as we shall see, is uncertain. Many other voluntary organisations would claim the right to self-government.

Partnership is mentioned in the Treaty Principles (2CA, 5CA, 11WT, 13WT, 14WT, 17WT). However it is clear that the Court of Appeal’s was referring to an ongoing relationship between the Crown and Māori with obligations to act reasonably and in good faith, akin to a partnership, echoing an earlier phrase, ‘the honour of the crown’.

The Court’s judgement does not require the partners to be of equal status. It certainly did not have in mind the institutional arrangement which is the basis of legal partnerships. Indeed, it explicitly rules that out with its principles of the right of the Crown to govern and the right of Māori to continue to exercise self-determination.

Of course, the Crown may enter into a legal partnership on a particular project with an Iwi, as it can with any other entity, as a pragmatic solution to a practical problem. But this does not involve any treaty principle.

Co-management arises out of the second article of Te Tiriti and is implicit in some Treaty Principles (2CA, 5CA, 9NZG, 13WT, 14WT, 16WT). It is a pragmatic solution where the status of taonga/treasures is unresolved.

For instance, the ownership of the Waikato River is complicated by Māori and English law having quite different conceptual frameworks of river ownership. Rather than litigating it was agreed that the management of the Waikato River would be assigned to a Waikato River Authority. Half the ten-member management board is appointed by the Crown and half by local Iwi in a co-management of the resource. The funding is from the Crown; the accountability of each board member is not to the institution which appointed them, but to the trust as set out in the legislation.

The essence of co-management involves management of resources in the public domain where management is shared within a trustee framework set out by legislation.

Co-governance

There is no definition of co-governance. As Prime Minister Chris Hipkins said, ‘no one understands what [co-governance] means because we’re talking about quite different things’. A March 2023 survey found that only 17 percent of respondents said that they had ‘a good grasp of the concept’; they are likely to have offered many different grasps

The notion of co-governance seems to have arisen out of an attempt to implement the 2007 UN Declaration on the Rights of Indigenous Peoples. However, the declaration does not use the word. It refers to ‘government’ on only three occasions: ‘self-government’ (Article 4); ‘intergovernmental’ (Article 41); ‘good governance’ (Article 46).

The He Puapua report, commissioned to respond to the declaration, did not define ‘co-governance’, but it recommended ‘the establishment of a high-level co-governance body comprised of equal numbers of government ministers and Māori representatives’, including that consideration should be given to the creation of an ‘upper house in Parliament that could scrutinise legislation for compliance with Te Tiriti and/or the Declaration [of Independence]. Various models for the composition of such a body could include a partnership model (with 50/50 rangatiratanga and kāwanatanga representation).’

The most prominent example of co-governance is the first ‘Three Waters’ proposal, to manage fresh-, storm- and waste-water by four entities whose boards would consist of half appointees of the Crown or district councils and half from Iwi, similar to the co-management of natural resources. This sharing of seats on the board seemed to be at the heart of the notion of co-governance.

But Three Waters is no co-management. It is not about water but the infrastructure to manage the water – up to – $200b worth of it. Water is a Second Article matter, better dealt with by Māori having a share of the water consents in an approach similar to fishing quotas. The initial Three Waters proposal would have been like requiring all holders of fishing quotas to have half their boards consisting of Māori.

Each water infrastructure entity would have been a monopoly, with an element of taxation from its powers to raise revenue by water charges and by area-based rates. Additionally, borrowing requires an underwriting of the loans in case an entity fails financially. In principle, if the governance is shared between local authority and Iwi appointees then the risk should be shared too, although it seems unlikely that Iwi could guarantee their share of the $200b. The financial accountability of the proposed co-governance entities was very unclear.

There has been no attempt to relate co-governance to the Treaty Principles nor to any reasonable historical or contemporary interpretation of Te Tiriti o Waitangi. With less caution it can be said that unlike partnership, self-government and co-management, co-governance has not been be derived from treaty principles.

ACT’s Treaty Principles Bill

ACT proposes legislation which would define the principles of the treaty as:

‘1. The New Zealand Government has the right to govern New Zealand.

‘2. The New Zealand Government will protect all New Zealanders’ authority over their land and other property.

‘3. All New Zealanders are equal under the law, with the same rights and duties.’[9]

Its Principle 2 is clearly narrower than the principles set out by the Court of Appeal, the New Zealand Government and the Waitangi Tribunal, nor does it conform to Article Two of Te Tiriti. It reflects the neoliberal account of the limited state and yet it could be said to repeal the explicit statements which restrain a majoritarian government’s treatment of minorities.

The proposed legislation is to go to a Parliamentary Select Committee for public consultation. If passed it would then go to a popular referendum. Currently no parliamentary party other than ACT supports the legislation.

New Zealand First’s Principles of the Treaty of Waitangi Deletion Bill.

In 2005, when in opposition, Doug Woolerton of NZF proposed a Principles of the Treaty of Waitangi Deletion Bill. [10] If passed, it would have deleted references to the Treaty Principles in 27 different Acts of Parliament. (There have been insertions in other legislation since.)

The proposal may not have been carefully thought through. For example, its effect would have resulted in section 8(1) of the Treaty of Waitangi Act 1975 reading:

‘The Tribunal shall examine any proposed legislation referred to it under subsection (2) and shall report whether, in its opinion, the provisions of the proposed legislation or any of them are contrary to.’ (The words ‘the principles of the Treaty’ were repealed).

At its introduction Winston Peters, the NZF leader, said that

‘This bill seeks to do three fundamental things. First, as the bill’s title implies, it seeks to remove all references to the undefined and divisive term “the principles of the Treaty of Waitangi” from legislation. Second, it seeks to reverse the insidious culture of division that has grown up around the existence of these principles. It has seen Māori pitted against Māori and non-Māori, seen family members pitted against each other, and gone right to the heart of our social fabric. Finally, the bill aims to put an end to the expensive and never-ending litigious programme that has sprung up around these principles. This programme has diverted hundreds of millions of dollars into dead-end paths and away from the enlightened programmes that are the true pathway to success.[11]

The bill was terminated rather than sent to a select committee. NZF does not seem to have raised the issue formally since. There is no mention in the NZF 2023 election manifesto nor in its 2023 coalition agreement with National.

Even had NZF been successful with its bill and removed every reference in statute to treaty principles, the courts, had they a mind, could have drawn on earlier precedents such as in the Court of Appeal’s 1967 decision.

Conclusion

The majority of the treaty principles are hardly controversial. They are articulated in terms of how the government should treat those of Māori descent restraining its majoritarian powers. We would expect the government to treat non-Māori in a similar way. One could envisage a statute binding the Crown to these principles which applied to all New Zealanders.

The one group of principles excluded from the sentiments in the previous paragraph are those which give Iwi a special status. Such preferences occur in other liberal democracies as when there is an established church or for some families (e.g. the Windsor monarchy). It is, however, a restricted special status.

What seems to be happening is that the expression ‘treaty principles’ is about a larger debate on the direction(s) a ‘modern’ New Zealand should/might take. Focusing on the principles fails to frame this debate in helpful or creative ways.

One concern is that those of Māori descent have some constitutional rights that non-Māori do not. (I assume that membership of an Iwi is treated as a question of family.) It is a belief of some Māori – I recall one who insisted he had rights under Te Tiriti to a medical treatment which would not be provided to a non-Māori. It is also the belief of some non-Māori, often with resentment.

While it is a larger task than I can do here, one could go through all New Zealand statutes (and policies) and identify those where Māori are differentiated. One example will illustrate the issue. The Treaty of Waitangi Act 1975 establishes a tribunal which can only hear grievances against the Crown initiated by a person of Māori descent. Initially the focus was on property rights unfairly taken by the Crown from Iwi despite Article Two of Te Tiriti, but the scope of the Tribunal’s enquiries has since widened to other perceived grievances. A fair-minded non-Māori might be envious.

I shall go no further because we need the full list of the examples to have a civilised discussion. Yes, there will be instances when treating Māori differently makes sense. My favourite example is that one of the first actions of the publicly funded Māori anti-smoking agency was to recommend smoking be banned on marae. (Māori smoking rates are well above average.) No non-Māori agency nor the Government would have dared publicly advocate such a course. It makes sense to provide public services differently to meet the cultural differences of various groups – but not only Māori.

Whatever the outcome of such a review of the statutes, it probably would not address all the public concerns. At their heart is social change, which is happening perhaps faster than in any other prolonged period of human endeavour.

Much is generated offshore and from new technologies. However, there is a domestic driver: the development of an Aotearoa New Zealand distinctive from the offshore heritage and relevant to the locality – call it ‘decolonisation’. It has been going on since day one of the arrival of the proto-Māori, and is very evident in the record of the first European settlers.

An obvious part of decolonialisation is ‘indigenisation’ – drawing on the culture of the tangata whenua – something which would happen even were there no Māori genes left in the world. (A simple example. A mountain was named after the 1769 First Lord of the Admiralty who may have been a precursor of Gilbert and Sullivan’s First Lord –in HMS Pinafore – who ‘never went to sea’. The name has been changed to ‘Taranaki’.)

There is considerable resistance to such changes, even if with eventual hindsight they seem logical – understandably so, for individuals get their intellectual foundations from their early years. (Keynes famously said ‘there are not many who are influenced by new theories after they are twenty-five or thirty years of age’.) I am often struck by popular views not unlike those I learned in my childhood in the 1950s: most Māori are almost only of Māori ancestry; a treaty in in English was signed on 6 February 1840 which was unique rather that one of many Britain signed with natives; ‘we’ fought against ‘them’ in the Māori Wars of the 1860s. The nostalgia may even extend to a wish that ‘they’ would go back to the pa, despite today the majority of Māori being in urban centres. (They are good for New Zealand sport though.)

Managing social change is not easy. The temptation is inertia; sometimes it happens faster than even the majority of those with goodwill can cope with. Resistance often ends up with not very relevant symbols. Thus it seems to be with the objection to the principles of the treaty.

Endnotes

[1] The paper avoids using the term ‘racist’. It is one of those dialogue stopping terms which appear too frequently in New Zealand’s popular discourse, and which has so many meanings that is meaningless.

[2] Based upon https://teara.govt.nz/en/principles-of-the-treaty-of-waitangi-nga-matapono-o-te-tiriti-o-waitangi

[3] https://teara.govt.nz/en/principles-of-the-treaty-of-waitangi-nga-matapono-o-te-tiriti-o-waitangi.

[4] https://www.waitangitribunal.govt.nz/assets/Documents/Publications/WT-Principles-of-the-Treaty-of-Waitangi-as-expressed-by-the-Courts-and-the-Waitangi-Tribunal.pdf (2001)

[5] https://www.tpk.govt.nz/en/o-matou-mohiotanga/crownmaori-relations/he-tirohanga-o-kawa-ki-te-tiriti-o-waitangi (2001)

[6] E.g. D. Baragwanath (2024) ‘The Treaty and Essential Freshwater.’ NZ Law Journal, February, p.8.

[7] This interprets 11WT – the principle of partnership – as the Court of Appeal set out: to act reasonably and in good faith akin to a partnership.

[8] Waitangi Tribunal (1988) Report of the Waitangi Tribunal on the Muriwhenua Fishing Claim (Wai22)

[9] https://www.act.org.nz/defining-the-treaty-principles

[10] http://www.nzlii.org/nz/legis/hist_bill/pottowdb2006661445/

[11] https://www.parliament.nz/en/pb/hansard-debates/rhr/document/47HansD_20050608_00001017/principles-of-the-treaty-of-waitangi-deletion-bill-first

Thinking About The Property Rights In Resource Decisions As Well As Transaction Costs.

This entry was posted in Environment & Resources, Pundit, Regulation & Taxation on by .


The Fast-Track Approvals Bill enables cabinet ministers to circumvent key environmental planning and protection processes for infrastructure projects. Its difficulties have been well canvassed. This column suggests a different way of thinking about the proposal.

I am going to explore the Bill from the perspective of its proponents with their focus on short-term material output (usually GDP or one of its variants). That means I am not going to canvass issues already covered in much on my writings of such things as the relationship between material consumption and wellbeing, the boundary between the market and outside the market including resource depletion, the distributional issues, the time horizon and so on. They are important, but if we try to deal with everything at the same time we get into the typical confusion which marks so much public discussion in New Zealand. Instead, I want to focus upon the narrow vision of the advocates of the Fast Track legislation of maximising material output.

One form of the theorem set out by Nobel Laureate Ronald Coase states that market decisions maximize material output if transaction costs are zero and property rights are fully allocated.* Some people use the theorem to argue that the market can rip away if there is private property, but it actually illustrates just how complicated market design is.

I once asked an economist who worked on the development of the Resource Management Act (RMA) how important the Coase theorem was in their thinking. You will recall this was a time when the penchant to let the market rip dominated much government policy. They looked at me in astonishment and said it had not occurred to them.

Had it done so, they would have been confronted with the fact that they were designing a system with very high transaction costs – as your lawyer will remind you when you are off to an environmental hearing. Moreover, underpinning every environmental hearing is the allocation of property rights. They are rarely unconstrained or simple. (You will find rules prohibit you from doing everything you may want to your house despite the slogan that a home is one’s castle.)

A reason that transactions costs are high and that the market cannot be left to itself is that the property rights involved with the RMA have not been fully allocated. I first began thinking about the relevance of the Coase Theorem to the RMA when I realised that its notion of sustainability, as the effect of giving property rights to the unborn. It says that they are entitled to an environment similar to today’s. (Whether that is practical is another matter.) But does it not also give some sort of rights to plants and animals which are near extinction?

But there are also rights to the living. What if a development proposal cuts out the sun from your property, or the view, or aesthetically offends you, or changes the nature of your neighbourhood, or …? There is a very long list of such potential infringements of what you value.

A doomsday book survey of all such property rights would have been impossible. Instead each case involves the courts determining the detail of the entitlements. The transaction costs become substantial, in which case the Coase Theorem says it is unlikely there will be an optimal outcome.

This may be making heavy weather of the RMA but it sheds light on the Fast-Track Approvals Bill. Nominally, the Bill aims to reduce the transaction costs of the RMA process; that is usually a good thing, especially if you think increasing material output is a good thing. (If there are side payments – such as political donations – an optimal outcome is not so obvious. Market theory does not conclude that political corruption leads to good outcomes. That is also practical experience – corrupt regimes have a poor economic record.)

However, the focus on the transaction costs means that the property rights issues can get lost. Many of those opposed to the bill expect that the implicit property rights of the environment will be overridden. Certainly at least some of the supporters of the bill have publicly discounted the property rights some of the opponents think they have – or should have.

In effect, the proposed legislation charges cabinet ministers (Infrastructure, Transport and Regional Development) from the coalition government with deciding on which property rights triumph. No doubt, the three think they will do so wisely, but I would expect them to blanche at the thought of three cabinet ministers from, say, Labour, the Greens and Te Parti Maori making decisions in their place. It would lead to a quite different assignment of those property rights and often there would be different outcomes. (One genius suggested that the proposed act be repealed after three years, ignoring that once the principle had been established it could be reintroduced by a government hostile to this one.)

Implicit in the Coase Theorem is that if property rights are not fully articulated and secure – as they are not when they are subject to political interference – the market will not work properly and the economy will suffer.

There is an even deeper issue. Should politicians determine the allocation of property rights? This is what happens in today’s Russia where Putin arbitrarily seizes property, including forced sales and imprisonment of property owners. (Hence Russian oligarchs living and investing outside Russia.)

But it was a feature of English life, six and more centuries ago. Monarchs arbitrarily seized their subjects’ estates and often had considerable powers in determining what happened to inheritances. (Like Putin, they even incarcerated or executed foes in the process.) Part of the reason for the subsequent success of the English economy is that property owners steadily reduced their monarch’s powers to interfere with property rights.

Are we returning to that situation? Well, the Fast-track Approvals Bill is a step on the way – some would say it is but a small step. I’ve not seen the usual guardians of property rights – the classical liberals and neoliberals – making much of a fuss over this. Is it because the property rights that are being seized are from future generations, from the environment and from small property owners? I leave them to respond. I doubt that Ronald Coase was wrong.

* For the cognoscenti, the theorem is a lemma from general equilibrium theory. That theory, and therefore the Coase Theorem, breaks down if there are multiple equilibria.

Do We Need A Population Census?

This entry was posted in Pundit, Statistics on by .


‘It has been said that figures rule the world. Maybe. I am quite sure that it is figures which show us whether it is being ruled well or badly.’ Goethe

I was struck at a recent conference on equity for the elderly, how many presenters implicitly relied upon Statistics New Zealand. We take SNZ for granted. Had it been drawn to their attention, many users would have been astonished. This is not just true for economists, but as the conference showed, it is true for social issues as well across a wider group of professions and thinkers.

Underpinning the SNZ’s work is a comprehensive data base of every New Zealander. Our data base comes from a five-yearly census of population and dwelling. The last was held in 2023; the results are to be released in August.

I am aware more than most of the value of the censuses. Economic data in the nineteenth century is scarce, so when I was working on an economic history of New Zealand I had to pay close attention to the population data. In the twentieth century, censuses were not held in 1931 and 1941 because of depression and war. We have no official estimate of how much unemployment there was in the Great Depression and we have only the vaguest idea of women’s contribution to the domestic war effort.

More recently, the 2018 census head count was poor. The statisticians in SNZ made a valiant effort to improve the unsatisfactory results that the incompetence of those administrating the count, but about once every month or so I meet an issue where I cannot trust the 2018 estimates, and those from the more reliable 2013 census are out of date – in fact I am usually trying to trace a post-2013 social change. Ah, you say, now we have sample surveys, but their reliability depends upon a comprehensive data base and they do not have the same detail and coverage.

SNZ is exploring whether they can make greater use of administrative data even to the extent of abandoning the regular census next due in 2028. A properly done census is very expensive. The 2023 census cost more than $300m. (The administrators tried to do the 2018 census on the cheap and we still suffer from the shoddy job.) Arguably, we could save a mint by using administrative data.

Does that mean we have an official population register? No, but almost everyone turns up in various official data bases and it is possible to meld them together to get a picture of each of us. SNZ, who does the melding, has strong statutory privacy restraints (as well as a professional ethos) that protects the public from turning this into an official population register. (Social statisticians such as those at SNZ are actually not very interested in the individual records providing they are comprehensive and accurate, because typically we are looking for patterns in the data.)

I would be very uneasy if the government knew as much about me as I disclose in my census return. The Census is double protected. As well as the general provisions in the Statistics Act there are additional protections for the Census. There have been famous occasions when the Government has wanted to use the Census as, in effect, an Official Population Register and Government Statisticians, bless them, have told politicians to go to hell, although more politely. (If SNZ could create an Official Population Register, then another government agency with fewer scruples could do the same. It would be far more interested in individuals.)

Additionally, there are issues which we need to know about for social purposes where the official data coverage is poor: disabilty, ethnicity, fertility, household composition, internal migration, religion and voluntary work, for instance.

We have no idea how reliable administrative data are for the purpose of a foundation data base.   We shall have a better idea following a comparison with the 2023 Census results but the study will take time and we need to make a decision about the next Census before it is done. In the interim, we should be reluctant to rely solely on administrative data bases.

What if the administrative data base proves inadequate? It would be a repeat of the 2018 Census in which a new system was tried, found wanting and there was no back up. Those of us who depend on quality statistics would be even more stranded – that is everybody.

Apparently the 2023 enumerators – those who knock on our doors – were subject to unusual levels of abuse. We do not know whether that happened as much in 2018 because the enumeration was outsourced and gave less feedback, but the abuse – some of it very unpleasant – was markedly higher than during the 2013 enumeration.

The reasons might include increasing social fragmentation, perhaps compounded by extraneous events like the turmoil from Covid. That is for a later conversation, which needs to be held. (If it is at all analytic it will be using data based upon SNZ statistics.)

I hardly saw any publicity; apparently it was targeted on others. (To make a confession, in the 45 years of writing this column, I have always written one about census time, explaining some facet of it as a small contribution to public understanding. The 2023 census was an exception, because it crept up on me without any of the usual alerts.) Perhaps there were people who resented the knocking at the door, because they did not understand it was about making a contribution to running the country. That is what a census means. If you are not counted, then you are likely to be ignored when policy decisions are being made.

That leads to a wider issue. The public profile of Statistics New Zealand is diminishing. Once a teacher would refer students to the New Zealand Official Yearbook in the school library. There has not been a yearbook since 2010.  I doubt nowadays that most school libraries have any printed material published by SNZ so the students don’t get that appreciation of it’s role. Yes, there is an SNZ website, which is invaluable for someone like me who uses it almost daily for a wide variety of issues. So complicated and rich is SNZ’s work, that the newbie faces a maze. I do too, but I’ve learned how to find my way through it (usually – sometimes I have to ask).

On every business page there are references to official statistics or analyses based on them. Other news stories do not feature population-based statistics so often, but they are there. However, the vital role of SNZ in the development of these stories rarely gets noticed.

Perhaps SNZ should be raising its public profile. I am not saying it should be as explicit as in Goethe’s: ‘it has been said that figures rule the world. Maybe. I am quite sure that it is figures which show us whether it is being ruled well or badly.’ But SNZ needs to convey to the public the task it is doing. It could do this with hard copy publications, a separate public friendly website (like Te Ara), and the Government Statistician taking a more prominent public role, promoting and defending the integrity of the statistical system. A former Government Statistician was unwise to dismantle the SNZ advisory system which generated a cadre of informed expert defenders of SNZ.

SNZ especially needs to guard against being seen as just managing the statistics for the government. It is managing them for the public too. You may have observed that the government spending cuts have been more directed at cutting services to the public and less to cutting services to the state. Focusing on administrative data and abandoning the census could be seen as symbolic of this narrowing remit; hopefully that is not Statistics New Zealand’s intention.

The Post-Covid Economy

This entry was posted in Macroeconomics & Money, Pundit on by .

Is the economy in another long stagnation? If so, why?

This is about the time that the Treasury will be locking up its economic forecasts to be published in the 2024 Budget Economic and Fiscal Update (BEFU) on budget day, 30 May. I am not privy to what they will be (I will report on them in due course) but the Treasury are competent economists persuaded by the evidence, so other economists should be able to make reasonable guesses at what is bothering them

Probably the economy is in a state of stagnation. I come to this conclusion on a slightly different basis from the news headlines – gone the day after – which we are all fed. First, I use per capita GDP as a measure rather than aggregate GDP. I got into that habit when I was writing an economic history of New Zealand because population growth in some periods dominated market economic activity (I use GDP well aware of its limitations both in content and sustainability; that is what the news headlines use.) Second, I do not use mechanical definitions of stagnation and recession because I am too aware of the measurement noise in the estimates (which are a proportionally bigger problem in a small economy like New Zealand than in a huge economy like the US which the news headlines tend to imitate). Those who lack economic and statistical judgement should stick with mechanical definitions.

The statistical record is that GDP per capita grew at about 1.6 percent p.a. between end-2010 and end-2019. Then the economy went into turbulence during the Covid nationwide lockdown of the first half of 2020. Since then, it has hardly grown at all. Sure, there have been ups and downs but eyeballing the chart, per capita GDP looks flat. End-quarter-2023 GDP per capita, which is that latest figure we have, is only fractionally above end-2019. The growth rate since then has been about a tenth of the pre-Covid growth rate at 0.16 percent.

Treasury’s 2023 Half Yearly Economic and Fiscal Update (HYEFU), locked up in November 2023, forecast that per capita GDP would fall in the three years to June 2025. The forecast seemed to imply that the economy will not to return to the end-2019 level until early 2026. As I say, I have not seen the Treasury’s  current forecasts but most of the economic news since November has been pessimistic, so it may be the Treasury will now be expecting the end-2026 level to be much the same as seven years earlier.

In the past I have treated such a seven-year stagnation as significant. It amounts to double the length of the traditional standard business cycle of the New Zealand economy, although it is shorter than the past major stagnations:

            – the Long Depression (1878 to about 1896 –18 years);

            – the Interwar Recession including the Great Depression (1908 to 1935 – 27 years);

            – the Post-War Stagnation (1944 to 1953 – 9 years);

            – the Wool Price Crash (1966 to 1978 – 12 years);

            – the Rogernomics Recession (1985 and 1995 –10 years).

(You can read more about them in the appendix of my Not in Narrow Seas: The Economic History of Aotearoa New Zealand.)

What is causing this stagnation? I discount political explanations as superficial. It looks as though this stagnation is going to straddle both the stewardship of Labour’s Grant Robertson and of National’s Nicola Willis. The negligible growth rate made it politically and fiscally difficult for Labour and is making it similarly difficult for National. Were the economy on its pre-2019 trend, the government’s revenue would be up an additional 6 percent. Even if the Coalition Government’s policies – such as the infrastructure spend – boost the long-term growth rate, their significant impact will be beyond the time horizon with which this column is concerned.

A possible explanation is Reserve Bank actions. In November 2022 a select committee asked the RBNZ Governor whether the central bank was deliberately engineering a recession to combat inflation. He answered ‘I think that is correct. We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.’

The difficulty with that explanation is that the economy seems to have already been in stagnation before the RBNZ took its action, Nor is one sure that Governor Orr expected his induced recession to last as long as even three years. Still, it is reasonable to suggest that the RBNZ measures to stifle inflation have contributed to prolonging the stagnation. (Or, as it might argue, that it has been the reluctance of players in the economy to get their expectations down.)

Undoubtedly, the beginning of the stagnation is to do with the onset of the Covid pandemic. Unfortunately, the measurement system which underpins our National Accounts was not designed to deal with this sort of shock. But even if we start the analysis at end-2020, when the initial shock was over, we still seem to be facing around six years of stagnation.

The international post-Covid economy has not been doing well. (And probably worse than the 2023 HYEFU assumed, which is one of the reasons the forecasts in the 2024 BEFU may be wound back.) It has also been a major source of the inflationary pressures that the RBNZ has been trying to resist. Add to this heady brew the economic impacts of the invasions of Ukraine and Gaza (although wars usually add to economic activity as well as to inflationary pressures).

We also need to be mindful of the possibility of ‘secular stagnation’ among affluent countries – a long-term slowing down of the growth rate of their material production. Perhaps New Zealand is joining them. It will take a number of decades to be certain whether this is, or is not, happening.

The fact is that the New Zealand economy has now been stagnating longer than one standard business cycle. The expectation is that it will continue to do so. Before proposing policies to boost the sustainable growth rate, there is a need to explain systematically why the New Zealand economy appears to be stagnating. Treasury’s 2024 BEFU should give us further insights.

Delivering Equity for Older People in New Zealand

This entry was posted in Distributional Economics, Retirement & Savings on by .

Introductory Notes for Brightstar Seminar: The Delivering Equity for Older People in New Zealand Grand Millennium Hotel, Auckland on Apr 30 & May 1, 2024

Thankyou for the invitation to contribute to this panel.

About twenty years ago, Suzie Carson and I were investigating wellbeing via the Household Economic Survey. We got what at first seemed to be an odd result: that there was not much of a relationship between income and wellbeing for the elderly.

The reason turned out that for the majority of the elderly – about four fifths – their income was New Zealand Superannuation with only a little more private income from savings, private pensions and the like. So their income distribution was very bunched up. That meant that other factors were statistically swamping any income effect.

We could not pursue this research because its funding was cut off, even though we were already publishing useful results. This was not a time when systematic independent research on wellbeing and the economic distributions was a priority. It is still not – so much policy in New Zealand is anecdote-driven rather than evidence-driven.

The factors which seemed to be swamping any income effect included accommodation, health and disability together with less tangible factors we could not have chased up from this data base including living situations, social networks, and the like.

I’d also have liked to explore the effect of age. Current thinking often ignores the difference between the young-elderly and those who are much older. Ninety-year-olds are very different from seventy-year-olds. Moreover, in twenty years’ time the experiences of ninety-year-olds will be very different from today’s, which makes thinking ahead even more challenging.

What does all this mean for policy? First, it says nothing about the current policy of increasing New Zealand Superannuation in line with general prosperity. But it suggests a very strong case for targeting extra spending on accommodation, healthcare, disability and social support.

It is not easy to target efficiently. Not only, as I explained, because of the differences between ninety-year-olds and seventy-year-olds but because the differences are changing – the targets are moving.

We are targeting – after all, this is what this conference is about – but because we have little comprehensive research, any targeting tends to be erratic, based upon a toe pinching rather than a full examination of the foot.

Or to use another well attested New Zealand trope, we need to pay attention to fences at the top of the cliff rather than just provide ambulances at the bottom. Actually, we don’t keep the ambulances near the bottom but expect them to turn up sometime. By golly, it can take a long time. That is because we focus on the pinching toe – on anecdote – and lack a comprehensive overview.

So, all power to your complaining about the pinching toe and the ambulances turning up late. But I make a plea that we also need a systematic independent research program to provide a framework which would enable the design of fences and the planning of ambulances. The research program that Suzie and I were pursuing would be a good immediate start, but in the long run we need an ongoing longitudinal survey of the elderly.

Brian is  a Research Associate of the Pensions and Intergenerational Equity Research Hub of the University of Auckland

Cutting The Public Service

This entry was posted in Governance, Pundit on by .


It is all very well cutting the backrooms of public agencies but it may compromise the frontlines.

One of the frustrations of the Productivity Commission’s 2017 review of universities is that while it observed that their non-academic staff were increasing faster than their academic staff, it did not bother to analyse the trend.

In today’s jargon it found that staffing in backrooms was increasing faster than in the frontline. This need not be a bad thing. For instance, the police force’s backroom includes ‘unsworn’ officers who carry out clerical tasks, relieving the sworn officers to spend more time on the frontline. On the other hand, academics have complained that their administrations have asked them to fill in forms compiled by people who had little idea what academics actually do; some ignored the forms – their institutions still seem to be running much as ever. For another example – one hears more grumbles than good reports, but that is the way of anecdotes – doctors were outraged to learn of an ethics unit in a DHB which seemed unaware that medical professions have been struggling with ethical dilemmas since before Hippocrates and did not consult them.

Sadly, the Productivity Commission flubbed the opportunity to carry out a detailed case study of the relationship between the frontline and the backroom despite it apparently being central to university productivity. Nor have I been able to find any other useful study. We rely on the treacheries of anecdotes.

The issue has become most pertinent recently with the government instructing its agencies to cut spending by 6.5 percent and more without compromising their frontlines.

Some of the cuts were easy. The Department of Internal Affairs is cutting most of the 400 plus staff who were working on the Three Waters program which the Government has abandoned. Cutting a service is a simple way of cutting staff (although this may be cost shifting and the jobs will reappear in local authorities funded by ratepayers). However that does not explain the rationale for most of the cuts.

Apparently, the Government thinks that a lot of backrooms jobs are not productive and can be dispensed with at little cost to the provision of public services. Where it got the notion from is unclear. It might be that they think they are mainly bullshit jobs although that problem is more bullshit work – only part of the total activity. (It occurs in the private sector.) That other activity may be critical is the effectiveness of those on the frontline.

The government agencies seem to have concurred with the Government view by cutting more than 3000 jobs. If those jobs can be dispensed with, does it mean that the agencies’ Chief Executives were running some highly inefficient operations? Were they all that inept? How come we appoint such amateurish senior managers?

Of course. not all were, but the effective Chief Executives who were already running lean backrooms were given similar targets to the others. That sounds neither efficient nor fair. (One has an uneasy feeling that those Chief Executives who have made the biggest cuts will be promoted, rather than demoted for running over-staffed administrations.)

The quantity target for the 6.5 percent cuts (plus a further 2 percent directed by the previous Labour Government, while some agencies had a further 1 percent added) seems to have come from the need to fund the Government’s promised income tax reductions. Presumably, this reflects its judgment that the private sector is carrying too much of the burden of the struggling economy; it is the view on which they got elected (although whether electors really understand their policies is moot). The Government may be right, although one would prefer that they were getting the savings from cutting programs and services rather nebulous backroom reductions.

But now the Government is saying it is doing the cuts in order to increase the number of workers on the front line. How that connects to income tax cuts is a bit puzzling – we await the 30 May budget to find out.

The claim one can easily shift resources from the backroom needs to be treated with caution. It is treating workers as fungible – easily interchangeable – like financial instruments. They are usually not. Obviously, some of the teachers working in the Ministry of Education can go back onto the front line. But what about those who have been working in the DIA’s Three Waters program? Give each layoff a shovel and tell them to fix a sewer?

I do not have answers to such questions. I wonder if they even occurred to the Opposition backroomer who invented the policy. That boffin is probably now an adviser in a minister’s office still as dependent upon anecdotes but beginning to face the realities which the Opposition are privileged to avoid. Ministers may be getting poor servicing, while the public may soon be suffering from poorer quality public services and cost-shifting onto them. (It might help if public servants drew more attention to the deteriorating services the public are getting and less to their own suffering – real enough though it is.)

Underlying this column is the concern that our public service is not well managed and its performance will further suffer as a consequence of these cuts. I am not making a party-specific criticism here. It is long since we had a minister of public services who seemed competent and genuinely interested in their quality. (And we have had some dud chief executives too.)

In fact, the quality of our public service is remarkable given the way it has been treated. But there is a general feeling that the quality is deteriorating, slowed only by the inertia inherent in the system. (Which may surprise, since we usually grumble about public sector inertia.)

What is needed is a thorough review. I do not mean a Royal Commission, but some solid research which focusses on nuts and bolts issues – like how public sector backrooms actually work. Without such a better understanding, cutting staff is compromising the effectiveness of the public service to the cost of the public and the politicians they serve.

So Much to Do: Dr Sutch on Poverty and Progress

This entry was posted in History of Ideas, Methodology, Philosophy, Portraits, Social Policy on by .

Commentary on Malcolm McKinnon’s Poverty and Progress in New Zealand: thoughts on WB Sutch’s work in historical and intellectual context. Stout Research Centre, 24 April, 2024

When Bill Sutch was first told by his physician that he had advanced terminal cancer, he responded ‘that can’t possibly be true, I have far too much to do’. He died shortly after – fifty years ago next year – at the age of 68. Sutch had done so much in his life already we might wonder what else he wanted to do. Working though his publications – 14 pages in his festschrift – gives us an indication. Sutch is one of New Zealand’s greatest intellectuals – especially in history and economics.

Dr Sutch would have been grateful for Malcolm’s presentation reviewing his two key publications Quest for Security and Poverty and Progress. What would he have said if he had been asked to provide this commentary? We can guess. I shall try to, but I am not Bill Sutch.

My guess is that, after thanking Malcolm, he would have pointed out his two books were part of a trilogy. The third, The Responsible Society, was published two years after Poverty and Progress in 1971. The unity of the three is reinforced by each book being dedicated to his daughter, Helen.

Helen summarised her father’s vision as:

‘He was a nation-builder who wanted to see an economically strong and socially fair New Zealand, free from colonial ties, whether economic or political. New Zealand had been a dependent colony, a monoculture which grew and processed grass, mainly sold to Britain as wool, meat and dairy products. Sutch saw the need to foster industry and employment, and to earn foreign exchange by exporting goods and services, as well as conserving foreign exchange through import substitution. Production had to be of high quality and make full use of human resources. Thus, he was a tireless advocate for the development of a national culture. People were at the core of his development vision: children were a key to the future, and women were entitled to equality both as a right and because it contributed to the broad social development. He advocated decentralisation to local authorities and was concerned with human rights. His vision was of an interventionist democratic state, promoting economic activity based on high-quality exports and providing protection and support via full employment and public education, health and welfare services.’

The origins of The Responsible Society are different from that of the other two which were first published thirty years earlier. The third is based upon Sutch’s submissions to the Royal Commission on Social Security which sat from 1969 to 1972. While it includes history, this book is much more prescriptive. Commission chairman, Justice Thaddeus McCarthy, said of Sutch’s submissions:

‘I see your plan here not as one standing by itself but as a part of what might also resemble a minor social revolution which you desire to see happening in the country in ways of our social living, our social approaches, which may be highly desirable.’

The 1972 Royal Commission had a narrower remit, focused on the 1964 Social Security Act. The extent to which it engaged with Sutch’s thinking is unclear, nor did Sutch write about the Royal Commission’s conclusions in the thirty months he had left.

From Sutch’s submission, we may be sure he would have commended the Royal Commission’s principle that:

‘The community is responsible for giving dependent people a standard of living consistent with human dignity and approaching that enjoyed by the majority, irrespective of the cause of dependency. ‘

No doubt he would have grumbled about how well the principle was implemented over the following 18 years. But he would have been astonished that it was so ruthlessly abandoned with the Richardson-Shipley ‘redesign of the welfare state’ in 1990.

It was not just that they cut benefit levels. They also changed the aim of the system. The Royal Commission had said that the aims of the incomes maintenance system should be:

‘First, to enable everyone to sustain life and health;’

,Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community; …’

The redesigned system of 1990 abandoned the second aim, focusing on the first with its minimalist (American-style welfare state) approach to income maintenance.

Had he been alive, the 83-year-old Sutch would have been appalled by the downgrading of the ambition. What would he have thought today – 34 years later?

He would still have been appalled by the redesign, but he would also have been concerned that 15 years of subsequent Labour Governments failed to reinstate the second aim. They increased support to dependants but it was still in the context of a minimalist welfare state. Sutch was very ambivalent about how radical or socially committed Labour was in his time; this was before Rogernomics.

It fact, the world has changed since the Royal Commission’s report. My book, Not in Narrow Seas – part written while a Stout Fellow at the Centre (thankyou very much) – describes critical assumptions to their policy proposals collapsing in the decade after, including:

            – a changing labour market which meant reported unemployment rates were structurally higher;

            – the inflow of women into the paid labour force from the unpaid household labour force together with the related shift to more flexible work hours;

            – the changing family structure;

            – Māori urbanisation.

It was those changes which led Ann Hercus, while in Opposition, to propose a second royal commission on social security in 1984. Unfortunately, her proposal got transmuted into the muddle of the 1988 Royal Commission on Social Policy.

Additionally, since 1974 the household data base has developed, triggering the modern research program on poverty which has, among other things concluded that New Zealand’s poor are mainly children and their parents/guardians, including those in working families. Had the 1972 Royal Commission had this evidence, it would have applied its principles to its policy recommendations differently; Sutch would have approved. In turn, today’s standard household model, which I developed then, was greatly influenced by the writings of the Royal Commission and Sutch.

Even so, such changes do not explain why the principles of the Royal Commission were abandoned. This presents a problem for the underlying thesis of Quest for Security and Poverty and Progress. As indicated in their titles, they saw material conditions driving cultural, social and political change, a widespread view in the intellectual community since the nineteenth century.

It is a less fashionable view among New Zealand historians today. It was a major reason why the 1988 Royal Commission on Social Policy failed; it paid so little attention to the material foundations of social policy.

They are a centrally organising principle in Not in Narrow Seas, which in many ways is a successor to the first two books of the Sutch trilogy (although in other ways I diverge from Sutch’s thinking). I add that neither Sutch nor I ignore the importance of ideas; in my case, as is evident from my frequent references to Keynes’ peroration about their significance.

How did Sutch’s great sweep of New Zealand development driven by the quest for security and the elimination of poverty come to an end in 1990? Yes, we are more secure, and poverty today is of a different quality. But that is not enough to explain the change. What has replaced it – complacency and greed? That is a nasty vision of New Zealand’s future.

I have struggled with this problem, not least in Not in Narrow Seas. So, I am grateful for a critical insight from Malcolm’s paper when he goes back to the 1883 debate between Harry Atkinson and Robert Stout. From today’s point of view, it is strange that Atkinson, who is generally thought of as a political conservative, was advocating a welfare state not unlike that which was established 50 years later in 1938. On the other hand, political liberal Stout was vigorously opposed to it.

Stout focused on the opportunities created by New Zealand’s development and the possibilities of self-improvement. It is ironic that Sutch paid so little attention to Opportunity-New Zealand in the two books. He was so scarred by the poverty in his childhood and in the Great Depression that he failed to reflect how marvellously he had succeeded. That was the stumble over his two drafts for the Centennial History – they weren’t celebratory enough. Had he written ‘Opportunity and Security’ or ‘Poverty and Opportunity’ perhaps the offerings would have been acceptable.

There need not be a tension between the two. I omitted the second sentence of the primary essential principle of the Royal Commission on Social Security:

‘The community is responsible for giving dependent people a standard of living consistent with human dignity and approaching that enjoyed by the majority, irrespective of the cause of dependency. We believe, further, that the community responsibility should be discharged in a way which does not stifle personal initiative, nor unduly hinder anyone trying to preserve or even enhance living standards on retirement or during times of temporary disability.’ [My italics]

You can see the notion of ‘opportunity’ there. Perhaps it was never true that the state provided a foundation for opportunity for all to do better. Only a few made it if they came from the wrong side of the tracks and were of exceptional ability – like Sutch – or lucky. Today it is certainly true that there are young people who are not realising their ability because of a family background of poverty nor, instructively, is this much concern in the public rhetoric.

Malcolm’s paper has only just triggered these thoughts. How they explain what happened after 1984 will have to wait on another occasion. In the interim, thankyou Malcolm and Bill – there is so much to do.

The Case For A Universal Family Benefit

This entry was posted in Distributional Economics, Pundit, Social Policy on by .


One Could Reduce Child Poverty At No Fiscal Cost

Following the Richardson/Shipley 1990 ‘redesign of the welfare state’ – which eliminated the universal Family Benefit and doubled the rate of child poverty – various income supplements for families have been added, the best known being ‘Working for Families’, introduced in 2005. The result of the various ad hoc incremental adjustments with confused objectives is a difficult-to-understand and poorly targeted system of family assistance.

As you might expect from such a Heath-Robinson arrangement, the outcome is inefficient in that it is both an expensive means of reducing family poverty and not very effective at reducing the worst child poverty. The clumsiness is well recognised but every attempt to get a better system of supporting children has failed because the approach has been incremental rather than a fundamental redesign – more strings to the rackety structure.

A simpler delivery of the same income support would markedly reduce child poverty without costing the state anything more – so inefficient are the current arrangements. Let’s call it a ‘Universal Family Benefit’ ((UFB). If differs from the one introduced in 1946, by its contribution reducing as the family earns other income. The bleed-out rate on this extra income is 39 percent (the top income tax rate).

To evaluate the proposal, I’ve used the Treasury’s microsimulation model of the New Zealand personal tax and transfer system TAWA (Tax and Welfare Analysis), which they use for assessing tax and benefit changes. (The Treasury is not responsible for these results, but thankyou for their help.)

The system would work by families choosing to go onto a different tax code – let’s call it the Family Tax Code (FTC) – which involved their paying 39 percent on all their market income. Additionally, the family would receive for each child an untaxed benefit of $255p.w. (the precise calculations apply for the 2021/2 year). They would not get all the other family tax credits and benefits would be stripped out (except for the adult part of the benefit which goes to solo parents). (Some high-income families would be worse off if they went onto the FTC; they would choose to remain on the existing tax code instead.)

The level of the child benefit was chosen so that the package had net zero fiscal cost (overall cost to the government). Yet despite the fiscal balance, the proposed package would result in 64,000 fewer children being below the poverty line (using the ‘moving-line BHC50’ measure; the broad conclusion of a marked reduction in child poverty will apply for any sensible poverty line). TAWA thinks there are about 115,000 children below that poverty line, so the UFB package would reduce the numbers in poverty by over a half – the ambition of the Child Poverty Reduction Act – without any extra government spending. One might argue that the current system of income support for children is less than 50% efficient.

There are modifications which would reduce child poverty (and increase the efficiency) even further. For instance, there is a case for having the family benefit higher for the first child. Best Start, which provides additional support for recently born children, should be kept. The simulation also left the existing housing and early child education support in place; both can be rationalised, with further gains.

Since the UFB is fiscally balanced, if some children (and their parents) are better off, it follows that some others (and their parents) are worse off. In fact, the scheme pushes 6,000 children below the poverty line as well as lifting 70,000 above it (hence the net 64,000 children).

The UFB also reduces the incomes of many families, although they would still be above the poverty line. That poor targeting is where the inefficiency of the current scheme comes from. (Typically, these are smaller families; the current regime underfunds the poor in large families.) This is an example of Rabin’s Law – named after an American economist, Matthew Rabin – that all policy change makes somebody worse off.

The big challenge of introducing a new redistributive scheme is how to get from the current inefficient scheme to a more efficient one without causing too much pain to those who are made worse off. That is the trick of the different tax code. A family does not have to join the scheme. On the other hand the rule would be that no family could join the existing Heath-Robinson scheme. Moreover, the old scheme rates would not be increased, so that it would become less costly and eventually phase out over time over time as families dropped off. (So there would be transition costs, which would temporarily unbalance the budget. Most incremental redesigns assume that their new scheme would be more costly.)

What is the catch (once we have got through the transition phase)? First, it involves combining both parents’ income, but that happens already. But it does not involve any household paying more tax, since parents could leave the tax code and miss out on the accompanying family benefit.

The big issue is the 39 percent uniform income tax rate. Many people will judge that too high. A high rate is necessary in order to finance the scheme. The tax rate could be reduced, but that would mean a lower UFB and more children left in poverty (while well-off families would do better).

The UFB is an extension of minimum income support. Those over 65 already have it in New Zealand Superannuation. However, universal minimum income schemes require high tax rates.

It is possible that some families faced with the high rate will choose to reduce the hours they work. In effect, income inadequacy is forcing them to work longer hours than they judge prudent. Many will be able to spend more time with their children, which is no bad thing. The most likely reduction will be parents choosing to finish work early so they can be home in the afternoon or during school holidays.

In any case, there are families already facing marginal income taxes far in excess of 39 percent. It is just that the muddle of current rules makes it hard to identify when that happens; the UFB is more transparent and less confusing (it may even require fewer bureaucrats to run it).

The reason that the scheme does not eliminate all child poverty is because it does not provide a minimum income for parents – that would require much higher income tax rates. But it will markedly reduce income stress in most poor families below the poverty line.

So it is possible to reduce child poverty substantially with simpler, more transparent and better targeted income support at no extra cost to the taxpayer in the long run.

As a final point, observe that this is an example of how difficult it is to replace a badly designed policy by a better one – a consequence of Rabin’s law. A poor-quality policy makes some people inappropriately better off. A better policy will make them worse off and they will resist the change. There are many other examples of badly designed policies; sometimes I think New Zealand specialises in them.

Accelerating The Growth Rate?

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There is a constant theme from the economic commentariat that New Zealand needs to lift its economic growth rate, coupled with policies which they are certain will attain that objective. Their prescriptions are usually characterised by two features. First, they tend to be in their advocate’s self-interest. Second, they are unbacked by any systematic empirical evidence using, instead selective anecdote. Well, yes; there is always an example to confirm one’s prejudice. But rarely will it stand up in a court of science. (The conversation is not helped by those who cannot discriminate between productivity growth is slowing down and productivity is falling.)

My research on economic growth has been driven by curiosity rather than seeking policy conclusions. It goes back to almost the beginning of modern growth economics in 1960 when we began having the data and the theories it generated.

I may have done more research on the topic than any other New Zealand economist. For instance, I can explain why in some periods the economy has grown more slowly than other affluent economies. The explanations are prosaic and do not depend on an ideology. The salutary conclusion is that there was not much we could have done to change the underlying growth rate. (That is not true for other measures; for instance, sometimes we could have avoided high rates of inflation – but with different costs from those that inflation imposed.)

That does not mean that we can do nothing about the economic growth rate. It needs actions to maintain it; some of those actions are in our powers. I remember a 1965 seminar – it was discussing then fashionable planning – at which someone said the concern was unblocking bottlenecks. A lifetime of research has demonstrated the wisdom of this observation. The best explanation I can give for economic growth (aside from moving resources from the non-market to the market) is the introduction of new technologies – blueprints on how to do things. They often require changes to policy.

For instance, Telecom could not work out how to create a broadband network. The government had to intervene to enable the rollout, breaking the bottleneck with a new telecommunications configuration based on Chorus. The strange thing is that while a comprehensive broadband network is a good thing for the economy and society (and has had dramatic impacts on our lives), I have seen no evidence that it has increased the economic growth rate. Perhaps if the rollout had not happened, the growth rate would have stalled, although I am not sure how to verify the proposition scientifically.

One of the strangest results from the research is that within measurement error the underlying long-run economic growth rate has been broadly constant since the 1860s – as far back as we can go. I am stuck with an explanation that the impact of those technological blueprints over the last two centuries has been broadly uniform. (I am not entirely comfortable with the explanation; any empirically based alternative explanations would be welcome.)

Bottleneck-busting best explains the New Zealand Productivity Commission (NZPC). The rhetoric was that its purpose was to increase the economic growth rate. There is not a skerrick of evidence that it has.

But the NZPC may not have been a failure. Rather, it has been reviewing growth bottlenecks. There are diverging views about how successful it has been. Some are ideological. Under the National Government the NZPC had a bias towards a neoliberal account of how the economy worked. Their friends commended their work, although in some cases the bias meant the NZPC did not chase up what I thought would have been fruitful lines of enquiry. When the Labour Government eventually appointed Commissioners who were more attuned to it’s view, the neoliberals began to vigorously criticise the NZPC. That’s politics.

Much of the work of both phases had little impact on the public debate. (However, policy analysts in the public sector have told me they found particular reports invaluable.) I particularly draw attention to Business by Numbers, published in February 2024, which usefully brings together a lot of information from various Business Operation Surveys. The report concludes it has only scratched the surface of what is available; there is a lot more work to be done before we can fully exploit the potential that the surveys offer.

Alas, the work won’t be done by the NZPC (or, probably, anyone else). The incoming Government has closed it down. When the NZPC was established, the National Minister of Finance, Bill English, said the intention was that it would be non-political and survive change of governments. It was in that spirit that the following Labour Minister of Finance, Grant Robertson, left the NZPC largely untouched until new appointments were necessary; so that for his first term the NZPC continued to operate as it had, with its neoliberal bias.

Despite the NZPC being a 2010 ACT initiative, it was the ACT party which abruptly abolished it in February 2024 in an exercise of taking no prisoners. (One is reminded of neoliberals in the 1987-1993 period; if it continues, the current Government may be reminded in the 2026 election of the collapse of support experienced by its predecessors.)

The funds saved from the abolition of the NZPC are being diverted to the newly established Ministry of Regulation. (It will be three times as large as the NZPC – here is one area the government is not cutting back.) Because it is a ministry – its minister is ACT party leader David Seymour – it will have less independence than the NZPC.

There is a view that what is stalling economic growth is over-regulation; abolish it and the economy will boom. It is hard to find empirical evidence to support the view. The last big attack on regulation was in the 1986-1993 period. It is difficult to show it enhanced the growth rate. Once the economy got through the stagnation from macroeconomic mismanagement, it returned to chugging along at the historical growth rate.

Because I wanted to believe that market liberalisation would benefit the economy, I put a lot of research into assessing the hypothesis. I concluded that the liberalisation seems to have led to a better quality of output, more variety and more resilience, none of which are measured well in conventional economic growth statistics. It was also more beneficial to the rich than the poor. But, blow me down, I could not find any acceleration of the underlying growth rate.

There is a counter-example. New Zealand’s fastest economic growth in the last century was in the late 1930s and the early 1940s under the First Labour Government, even when we have allowed for the recovery from the Great Depression. It was also a period of a substantially increasing state regulation of the market. I do not think the additional interventions explain the growth boom, but the episode suggests they did not retard it either.

There is a case for more pragmatic attention to regulate better. Two examples I have looked at illustrate the need. The Leaky Buildings Disaster was a case of under-regulation which cost the country millions of dollars to replace badly built homes and other buildings, while stressing many homeowners. The 2016 Building (Earthquake-prone Buildings) Amendment Bill is a case of over-regulation which is costing the country millions of dollars to unnecessarily modify homes and other buildings, while also stressing many homeowners.

Business by Numbers devotes a chapter to business views on regulation. It found grumbling rather than griping. (The largest concern is workplace safety rules.)

There is certainly a case for better regulation of markets. It would be great if the Ministry of Regulation meets the challenge, although it won’t unless it approaches each case pragmatically. I doubt that it will have much impact on the economic growth rate but, done well, it will improve the quality of life of New Zealanders.

PS. I am puzzled why the Minister of Regulation is not one of the ministers to make the final determination on Fast Track Approval. The current proposal involves the Ministers for Infrastructure, for Regional Development and for Transport (sometimes the Minister for Conservation will be involved). It almost suggests that the government is running two separate economic development policies.

Does A Fiscal Debt Target Make Sense?

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Do we treat the government finances with the common sense that household’s manage theirs?

It is a commonly held view that we should treat the government as if it is a prudent household. We don’t when it comes to its debt. Currently the government says it wants to constrain its net debt to between 20 and 40 percent of annual GDP; that is, between about 67 and 133 percent of its annual revenue. But households borrow up to 450 percent of their annual before-tax income.

Households borrow at that rate to purchase houses. They look at the whole of their balance sheet including their assets as well as their liabilities. When did you see mention of government assets in a discussion on our debt policy? For the record, they sum to about 400 percent of government annual revenue although not all generate income or save spending. Net worth (which deducts all the liabilities) is about 133 percent of annual revenue.

Focussing solely on debt without looking at the balance sheet as a whole distorts public investment. Some examples:

Suppose a significant private business collapsed (as did Air New Zealand and Kiwi Rail) and the best rescue involved the government taking over the enterprise. Even if there was no equity to be purchased, the government may have to take over the failed business’s debt. ‘Sorry, minister, you can’t rescue the business because that would exceed the debt ceiling.’

Suppose we wanted to tackle the problems of our fresh-, storm- and waste-water which will require borrowing up to $20b in the next 30-odd years. The most cost-effective structure would be to leave the responsibilities for water with (large enough) regional authorities which borrowed their funds from a central government agency which borrowed the $20b (or whatever) offshore. ‘Sorry, Minister, you can’t do that because the central agency would appear on the government balance sheet which would then exceed its debt ceiling. So we will have to design a more inefficient and costly solution.’

‘Sorry, Minister, you can’t get around the debt ceiling constraint by using a public-private-partnership in which the private sector does the borrowing but the government services the debt.’ Other countries use this ghost public debt so they can, in effect, borrow more than their debt ceiling allows. But it is still a government liability and, because we use more rigorous accounting standards, it appears as such as in the Government’s Financial Statements and is included in overall debt. (Currently it amounts to $3.7b. It is backed by two state highways, three corrections facilities, and some education assets.)

On the other hand ‘Sorry, Minister, your focus on a debt target ignores any assets which may match it means that we are failing to provide sufficient infrastructure and maintenance to offset the depreciation of assets. Not just central government. Local government too. That is one reason our fresh-, storm- and waste-water systems are increasingly failing us.’

It’s Gilling’s law isn’t it? By prioritising the debt target we shape the game to ignore assets.

There are complications. A household’s borrowing is not simply constrained by its belief in its ability to service the debt. It is also constrained by the willingness of lenders to advance the funds. They are particularly concerned that they can recover their advances if things go belly up. (That is why they won’t advance you unlimited amounts to speculate on crypto-currencies, even if you think it is a sure thing.)

International lenders have got tangled up in countries which cannot meet their debt obligations. So they are cautious. Even so, New Zealand’s relative public debt level is well below the debt levels of many countries which are considered prudent borrowers.

There is a case we should be a little below that level. All prudent households (which are not facing too much hardship) hold a reserve they can use for an unexpected shock. It may be cash or an investment which can be readily liquidated; it may be an additional capacity to borrow. New Zealand has some of the former (the Reserve Bank has foreign exchange reserves) but low public debt makes it easier to borrow offshore in an emergency. New Zealand is probably more vulnerable than average to some shocks – earthquakes, volcanoes and tsunamis and the volatility of its terms of trade (but not militarily shocks so much) – so we need to maintain a lower debt level than what is normally accepted. (Another factor is the private banking debt, which may be pushed back onto the Reserve Bank in a financial crisis, but we have greatly reduced that exposure since 2008.) A margin for additional prudence does not explain all the difference in our lower debt target.

Observe too, that the above analysis has been in terms of debt levels offset by assets. It did not argue we can borrow for consumption. (It accepts a government may borrow or raid the reserves for short-term emergencies; any net asset reduction should be reversed reasonably quickly.)

Let me passionately state a moral perspective. Public borrowing is a cost to future generations. I do not think one generation should borrow unless it can justify its debt servicing to those yet-to-be-born, even if deciding what they will value when they are adults may be difficult. The decision is easy for investments which make a return; it is much harder where the borrowing funds activities which do not.

There are items which do not give a financial return but can be justified; conservation and heritage projects for instance. Future generations are likely to bless us if Aotearoa New Zealand is predator-free in 2050 (although the amount of borrowing the program generates is trivial).

Conversely, education is an investment but (largely) an investment in the individual who may migrate taking their education with them. I am committed to providing every New Zealander with a decent education (and healthcare) but it should be funded from current revenue.

The logic of this analysis is critical of the current government fiscal strategy, which amounts to borrowing for current consumption via income tax reductions. We are not in an emergency (and the government is not proposing to reverse the tax cuts when it gets through the current phase). We should support borrowing for projects which future generations would value, such as in conservation and infrastructure.

Once we ran the government as if it were a prudent household. Initially Keynesian management ran a surplus on current public spending which was invested in businesses and infrastructure; further funding was supplemented by borrowing. Today we are not as prudent. Borrowing to fund consumption is likely to be unfair, inefficient and detrimental to future generations.

If we are to have a target, perhaps something like the following: over a medium term, public current spending including transfers should not exceed public revenue. In the medium term, public borrowing should only be for public investment.

How Are We To Think About Winston Peter’s Fiscal Hole Claim?

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Budget tensions are becoming evident within the Coalition Government.

Winston Peters made numerous political points in his speech to the NZF annual conference. But the attack on his own government’s fiscal policies raised issues of substance.

     ‘Today in the Sunday Star Times, journalist and former advisor to the Labour Government, Vernon Small, refers to the ‘present government facing a fiscal hole’ of $5.6 billion. He’s right of course, but he’s wrong when he said that last year politicians were warned of that. Only one political party in the 2023 [election] campaigned to alert New Zealanders as to how bad things were. New Zealand First pointed out where optimistic predictions of others were false – such as the ‘House Buyers Tax’, and taxing on overseas online gambling.’

Small’s column has an interest even had Peters not referred to it. It was sufficiently confident to suggest he was relying upon a reasonably informed source. That does not mean Small’s estimate of the fiscal hole was correct. There has been a lower estimate of $3.6b, in contrast to a promised saving from expenditure reductions of $1.5b. I don’t think includes the promised tax cuts. The numbers are all over the place and probably do not add up. Small and Peters gloom was broadly confirmed by Minister of Finance Nicola Willis in her recent Budget Policy Statement.

Whatever, Peters seemed to be attacking the fiscal stance of his National and Act colleagues or perhaps even disclosing an internal Cabinet debate. What was the political purpose? Peters must have realised it would both embarrass his coalition partners and add to the instability of the coalition.

I do not know how advanced the internal Cabinet debate about the 31 May Budget is. However, it is usual at this stage in the process that the external task is to manage public perceptions – as Willis has been doing. I cannot recall an earlier New Zealand budget where the usual tensions have appeared so explicitly in public so soon.

There are two views of Peters which might help provide an answer.

One might be called ‘Winston First’, which was the title of a 1995 book, by Martin Hames commissioned by those with a neoliberal disposition. It portrayed Peters as an unprincipled self-seeking politician who cynically sought popular support for his personal ends. This was to explain why Peters left the National Cabinet in 1992, when it was in its full neoliberal glory. (Peters is not the only politician to be so explained by ideologists who cannot understand why anyone would disagree with them.) That he is a politician without principles seeking only personal gain is a widely held view by those on his left as well as on his right. Peters has sometimes reinforced the perception with populist stances he has taken.

Why would Winston First have publicised the fiscal critique? Its logic might be that it would precipitate events which would result in him becoming full prime minister.

That seems unlikely. Suppose the Coalition Government collapsed. There would be an election. Perhaps NZF’s share of the votes might rise, but a stronger possibility is that it would get blamed for any collapse. That is hardly a path to WP4PM, especially as Peters appears to be currently cutting off the possibility of an NZF coalition with the parties on the political left.

(We can rule out the relevance of a scenario in which the left wins an early election, fails again, and NZF is triumphant in 2028. Peters would be 83, older than Biden is today.)

The alternative to Winston First portrait might be called WPPPP: Winston Peters – principled, populist, politician. Perhaps ‘politician’ is redundant. It is there to remind us that he is continually seeking a coalition of the voting public to support him and that sometimes that coalition involves some strange bedfellows.

‘Populist’ is there because Peters in style and belief naturally connects with a broader population with its scepticism of the political elites. In turn, the elites do not connect with him. He does not fit their models of a Māori boy from a poor rural background who should be a deferential conservative or angry lefty. Peters is an angry conservative.

That is where ‘principle’ comes in. Peters has some deep principles which are poorly recognised – those of a rural working-class New Zealand Tory. This is not a well discussed political group (nor its urban equivalent) even though it is more common than is recognised; a chunk of the working class regularly votes on the right.

It has a view that New Zealand is a land of opportunity. While it may be sympathetic to those in difficulty, it is coupled with a suspicion of state welfare because it may sap initiative. The view is critical of the Brahmins on the left, who are considered out of touch with the common people (and often excessively woke), and of Big Commerce on the right. It is strongly New Zealand nationalist.

This philosophy was expressed by Peters in his 1979 maiden speech with its belief in ‘free enterprise’ and encouraging hard work, and his description of coming from a poor family which thrived by working together.

Peters loathes neo-liberals. It is not just a question of ACT taking up potential support of the non-left who dislike National from NZF. In 1993 Peters left the National party – he had been a member for twenty years – because of its neoliberal policies. Peters said in his 2017 speech anointing Labour as the main party of the next government:

     ‘The truth is that after 32 years of the neoliberal experiment the character and the quality of our country has changed dramatically, and much of it for the worse. … Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human – face.’

So he sees NZF restraining ACT and the neoliberals in National the the Coalition Government. (Despite ACT having more of the voter numbers than NZF, it has less power because a party on a political extreme has fewer options. Additionally, Peters is politically more experienced and probably politically smarter than the leaders of National or ACT. Counterbalancing is not a vain objective.)

It is not an exaggeration to see the fiscal debate that is going on within today’s Cabinet involves tensions between the extreme-right and centre-right. WPPPP’s conference speech was bringing them into the open in order to weaken the neoliberals.

A final point: Peters is indicating that he had an unhappy time in the Labour between 2017 and 2020 and he appears to be in difficulties with the current Coalition Government. The one other time he has been inside a coalition Cabinet was between 1996 and 1998. (He was outside Cabinet in the 2005-2008 Clark-Cullen Government.) In 1998 Peters fell out with Jenny Shipley, who is a neoliberal. Earlier he had got on well with Jim Bolger, who is also a rural working-class Tory (his family farm was not affluent) and who has also expressed doubts about neoliberalism.

Inflation: Creeping Toward Fiscal Management

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Note written for circulation in March 2024

There’s almost no issue on which outgoing Labour MP and former Finance Minister Grant Robertson would find agreement with former National and Act leader Don Brash. But when Robertson was asked during his exit interview with the Herald whether he thought it was worth considering Brash’s idea of moving away from the blunt Official Cash Rate as the Reserve Bank’s primary tool for controlling interest rate[1], he said it was worth looking at, at least. (‘Weekend Herald’(March 23, 2024)[2]

My purpose here is not to explore the constitutional implications of taxation being implemented without representation (although the First British Empire fell because they pursued this course). Nor do I want to explore the fact that Brash took a different position when he was Governor of the Reserve Bank – one is allowed to change one’s mind. Rather, I want to consider the evolving issue of fiscal management being used to regulate demand in the economy for macroeconomic purposes, albeit for anti-inflationary purposes rather than the traditional ones of managing the business cycle or the external current account.

Even traditionally – when I was a lad – it was recognised that interest rates could have a role in this demand management. However, there were a number of reasons not to rely solely on interest rate management. Perhaps the most compelling at the time was that the burden of adjustment was carried by only part of the economy – investment, inventories and consumer debt purchases. Since it was only part of the economy, the burden on those components was far larger than if the burden had been shared across the economy. One could go on to describe the side effects of the imposition, especially on capital formation, but that is not necessary here.

(Demand restraint often means a rise in unemployment with incomes – especially wages – not rising in line with prices and productivity. So part of the burden of adjustment is borne by low-skilled, low-income workers, especially. That is always true.)

In those days the exchange rate was fixed. Once the exchange rate was floated, the export sector was to those activities which would take the brunt of the demand management since interest rates would impact on the exchange rate.  (It is unnecessary for the purposes of this note to pursue the issue further; it is mentioned for completeness.)

However, there was another channel of adjustment which was once not paid a lot of attention. Today a powerful reduction in aggregate demand comes from higher mortgage interest rates. Essentially, a rise in the OCR raises interest rates across the economy, so that mortgage holders have to cut back their other spending thereby reducing aggregate demand.

The models we use to discuss these macroeconomic stories typically excluded any distributional effects. It is a part of the common assumption of the dominant economic paradigm that distribution does not much matter. (Which, not incidentally, is a major reason why economists have less impact on the political economy than they think they deserve.)

Moreover, traditionally – when I was a lad, to be confirmed when when we got the data – interest paid by households was about equal to interest received by households. That meant that a rise in interest rates simply redistributed income among households. That is no longer true. Today households borrow offshore (via banking and other financial intermediaries) so that household interest payments exceed household interest receipts. A rise in interest rates transfers income offshore. I leave others to discuss whether those matters.

What certainly matters is that the impact of the measures to reduce inflationary pressures affects one group in the community far more than others and, as in the previous examples I have given, the burden is greater on a narrow, and often more innocent,  group in the economy than if it were shared more evenly.

That is a point Brash made: recent home purchasers with large mortgages were hit more heavily than long-time home purchasers, while those who were about to purchase their first home had their ambitions further thwarted. As I noted elsewhere, children are particularly affected.[3]

The view that Brash and Roberston seem to be favouring includes that when aggregate demand needs to be restrained, GST should be increased, so that aggregate consumer demand is reduced across all households; that would share the burden of adjustment more widely. I leave others to judge whether such a policy would be equitable, although it would probably be more equitable than loading all the adjustment onto home owners with mortgages.

(I mention that it is very hard to explain to the public how increasing prices via a GST hike is anti-inflationary; it would be a repeat of the difficulties we used to have when a hike in excise taxes on tobacco and alcohol was justified by saying it was fighting against inflation.)

The previous paragraph neither supports nor rejects changing GST rates as an anti-inflationary measure. There are some obvious administrative problems as well as constitutional issues (see the appendix on the ‘regulator’). But it would also be helpful if advocates would quantify the tradeoff between an interest rate hike and a GST hike; what is a percentage-point hike of GST equivalent to a change in the OCR in terms of the impact on aggregate demand?

Rather, the point of this brief and simplified ramble though New Zealand’s macroeconomic policy history is that there seems to be some (growing) return to the recognition that there is a role in aggregate price management from fiscal policy as well as from monetary policy. Even the current governor of the Reserve Bank has said that fiscal policy could help the RBNZ. The purpose of this note is to encourage some careful discussion on what that role might, or could, be rather than locking us into the commentariat obsession with monetary policy alone.

Appendix: The Regulator

The ‘regulator’ was a measure used in Britain in the 1950s and 1960s. An Act of Parliament gave to the Chancellor of the Exchequer the power to change overnight the excise duties on alcohol and tobacco (possibly also petrol – I don’t remember) without consulting Parliament. However, the Chancellor then had to report to Parliament shortly after and was, in principle, open to the House of Representatives rejecting the change. That was unlikely given the Chancellor’s party was in the majority but it meant that the elected representatives of the people were still formally in charge of taxation. Were the tax changes to be made by a governor of the central bank, there would be no certainty that the governor had the confidence of parliament.

Endnotes

[1] The newspaper text says ‘interest rates’. Possibly Brash said that, but from the rest of the article ‘inflation’ seems more likely. Perhaps the journalist misread his short hand.

[2] https://www.nzherald.co.nz/nz/politics/one-thing-that-grant-robertson-and-don-brash-think-is-worth-looking-at/OZ3BCJXDYVEQFF3WDVA7SM2ONE/

[3] . https://www.pundit.co.nz/content/why-did-child-poverty-increase-recently

Fiscal Policy Is Getting Harder According To The Minister Of Finance

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Is she hinting that the Coalition Government will have to back down on key promises it made in Opposition?

The Minister of Finance, Nicola Willis, is telling an evolving story about her fiscal challenges. In Opposition she was confident that she could deliver her promised income tax cuts. Appointed minister, she reported the (Treasury) ‘books’ were in a worse state than she expected, although this seems to be more from her advisers not reading the Treasury’s Pre-election Forecast and Update carefully enough. It’s a good trope because it blames the outgoing government, but it’s hardly the analytic foundation to plan the 31 May budget.

More recently, she has been arguing that the economic outlook is tougher. The Treasury September 2023 PREFU, and just about everyone else, had forecast a stronger economy for 2024 than now looks likely.

We won’t have the detailed Treasury macroeconomic forecast until the end of May, but the Reserve Bank’s Monetary Policy Statement has one although, alas, not as detailed nor as structural as Treasury’s so that it is harder to analyse.

Even so, we can get some insight into the deterioration by comparing the RBNZ February 2024 forecast with the November 2023 one. It would appear that it is now expecting the economy to track about 1 percent lower than was expected three months earlier. The commentariat has just announced the economy was in recession in the last 6 months of 2023; a more detailed analysis suggests the economy has been stagnating since the middle of 2022. The forecasts do not expect the economy to really pick up before the end of this year. That means per capita output has been falling and will continue to fall through the year. Next year might be better – it might not.

The fall appears to be from lower than expected private consumption and possibly in exports – although the RBNZ now expects export prices to be better – and public expenditure (neither of which it reports). Business investment has hardly been changed.

You may not think these changes are large but lower GDP translates into lower tax revenues, compounding the fiscal problem Minister Willis faces. It appears that some of the Opposition’s estimates of the additional revenue from tax changes were markedly optimistic. Probably – we shall need to wait until May to find out – the gains from cutting some public expenditures, such as on investment projects and social security benefits, have been spent already (e.g. on reinstating for landlords the income tax deductability of interest rates).

In Opposition, the minister said her plans depended on cutting government spending in many areas by 6.5 percent and more, without being aware that previous Minister Robertson had already ordered 2 percent cuts. They are proving difficult to attain. The public sector is not being curmudgeonly. Rather, the government is reluctant to cut programs. Instead, it is requiring substantial productivity increases, which are much harder to get in service industries. (Another possibility is there will have to be cuts in the remuneration of public servants – they will not be compensated by the promised income tax cuts.)

Oppositions tend to be more optimistic, thinking the economy will grow faster under their benign influence. I do not think the prolongation of the current stagnation is anything to do with the new coalition government; business is not expected to revise its investment plans in either direction. On the other hand, there is no evidence the new government has caused the economy to grow faster (sustainably – it can always be boosted for a few quarters).

The National Opposition’s optimism was evident in some of its estimates of tax revenue from others of its policies, with some revenue-raising initiatives even having to be abandoned. So the additional revenues side of their policies is looking weaker too.

There are claims (notably by Winston Peters) that the government faces a huge fiscal deficit if it implements its policy promises. I don’t know whether this is from access to inside information. I’ll wait until the Treasury bean-counters’ figures are revealed.

All this makes the promised income tax cuts difficult to finance without additional borrowing. Minister Willis has already announced she will be borrowing more, with the return to zero net borrowing delayed by one year.

It is all about squaring the circle, isn’t it? So easy to promise in the fantasy of opposition, so hard to attain when you are in the reality of government. It is not just that oppositions tend to be optimistic about themselves. They do not always have the technical capacity to analyse the deeper issues. (One National Opposition spokesperson on finance appeared to be innumerate – as the Labour government gleefully exploited.) We are likely to see similar challenges in the current Labour Opposition.

In opposition, Willis said she would resign if she does not deliver on her promised income tax cuts. Other politicians have made similar promises and reneged on them. That is not an easy course, requiring both courage and political skill. But ultimately it is better for the economy and the nation to live in the reality of government than the fantasy of opposition.

In government, Willis, while denying any fiscal shortfall of the size Peters claims, says she won’t guarantee the promised tax cuts will arrive in July until the policy has been discussed by Cabinet. Perhaps her shift on the state of the economy is preparing the public for moderating or delaying the cuts. If the fiscal situation is proving as difficult as one fears, I hope so.

You will find this columnist criticising the government when politics dominates economic commonsense and approving it when it makes good economic decisions. That does not mean I agree with the values which frame its decisions (any more than I did with previous governments).* In a sense I am like a Treasury official. They accept the political direction of their minister – even when they personally disagree with it – and do their best to design policies to implement their minister’s desires. But the desires are limited by reality; the hard numbers in their accounts and forecasts are a part of that limitation. I guess not a few officials are looking forward to the 31 May budget with apprehension. So should their Minister.

* For example, I am less enamoured with the incidence of the proposed income tax cuts. If they are intended to ease pressures on households from inflation, as the minister says, it might be better to target them more on households paying high mortgage interest rates. But there are not as many votes in such a strategy.

Winston Peters 17/03/24

This entry was posted in Macroeconomics & Money, Political Economy & History, Portraits on by .

This note was to try to clarify my thinking about what was going on in WP’s speech to the party on Sunday 17 March. It was, of course, a speech to the NZF annual conference which makes numerous political points – some valid. But the attack on his government’s tax policies is something in addition.

The bit in the Palmerston North speech I was intrigued about is:

‘Today in the Sunday Star Times, journalist and former advisor to the Labour Government, Vernon Small, refers to the ‘present government facing a fiscal hole’ of $5.6 billion. He’s right of course, but he’s wrong when he said that last year politicians were warned of that. Only one political party in the 2023 campaigned to alert New Zealanders as to how bad things were. New Zealand First pointed out where optimistic predictions of others were false – such as the ‘House Buyers Tax’, and taxing on overseas online gambling.’

One possibility is that this section was a late insertion or redraft following reading of Vernon Small’s column in the paper (or online) that morning. Seems unlikely. The probability, but not certainty, is that Peters knew it was being released.

Small’s column has an interest even had Peters not referred to it. It struck me at the time that it was well informed and that Small, a journalist, was relying upon a reasonably informed source – even an official paper. What was the source? At the very least, the coincidence of the column with the day of Peter’s speech was serendipitous.

Be that as it may, Peters could be said to be attacking the fiscal stance of his National and Act colleagues or, at the very least, disclosing to the public an internal Cabinet debate. What was the political purpose (other than bolstering the troops and the public)? Peters must have realised it would both embarrass his coalition partners and added to the instability of the coalition.

To be clear, there is an internal Cabinet debate about the fiscal options for the 31 May Budget (although how advanced it is I do not know). However, it is usual at this stage in the process that the external task is to manage public perceptions – as Minister of Finance Nicola Willis is doing. I cannot recall an earlier New Zealand budget where the tensions have been so explicitly in public so soon (I can think of instances elsewhere).

There are two views of Peters which might help provide an answer.

One might be called ‘Winston First’, which was the title of a 1995 book, by Martin Hames commissioned by those with a neoliberal disposition. It portrayed Peters as an unprincipled self-seeking politician who cynically sought popular support for his personal ends. This was to explain why Peters left the National Cabinet in 1992 when it was in its full neoliberal glory. (Peters is not the only politician to be so explained by ideologists who cannot understand why anyone would disagree with them.) That he is a politician without principles seeking only personal gain is a widely held view by those on his left as well as his right. Peters has sometimes reinforced the perception with populist stances he has taken.

Why would Winston First have publicised the fiscal critique? Its logic might be that it would precipitate events which would result in him becoming full prime minister.

That seems unlikely. Suppose the Coalition Government collapsed. There would be an election; there is no evident alternative. (I am assuming a minority government would not last long.) Perhaps NZF’s share of the votes might rise, but a stronger possibility is that it would get blamed for the collapse. Neither National nor ACT are likely to collapse the coalition, other than in the unlikely possibility that National thinks it could win enough votes to govern only with ACT; that would only succeed if voters were convinced it was NZF’s fault. That is hardly a path to WP4PM, especially as Peters appears to be currently cutting off the possibility of an NZF coalition with the political left.

We can rule out the relevance of the eventual scenario that the left wins an early election, fails again, and NZF is triumphant in 2028. Peters would be 83, older than Biden is today.

If the speech does not make the Winston First portrait plausible, what might be an alternative? I am going to call it WPPPP: Winston Peters – principled, populist, politician. Perhaps the ‘politician’ is redundant. It is there to remind us that he is continually seeking a coalition of the voting public to support him and sometimes that coalition involves some strange bedfellows.

‘Populist’ is there because Peters naturally connects with a broader population both in style and belief, with its scepticism of the political elites. In turn, the elites do not connect with him. He does not fit their models of a Māori boy from a poor rural background; they should be a deferential conservative or angry leftys. If anything, Peters is an angry conservative.

That is where ‘principle’ comes in. Peters has some deep principles which are poorly recognised. His may be described as those of a rural working-class New Zealand Tory. This is not a well discussed political group (nor its urban equivalent) even though it is more common that is recognised for there is a chunk of the working class who vote on the right.

As best I can summarise it the view is that New Zealand is a land of opportunity. (Typically those who hold the view have ‘made it’.) But it is suspicious of state welfare because it tends to sap initiative, so while holders may be sympathetic to those in difficulty, they have an antipathy to collective action. The view is critical of the Brahmins on the left, who are considered out of touch with the common people (and often too woke), and of big Commerce on the right. It is strongly New Zealand nationalist.

Much of this philosophy was expressed by Peters in his 1979 maiden speech:

‘I believe the most effective government the country can have is one that believes in free enterprise, encourages hard work, keeps control and regulation to a minimum, carefully controls State spending, and sets taxation rates that are an incentive, not a disincentive, to work.’

He went on:

‘By sheer hard work, beginning in the Depression, my father, with the help of his family, developed a dairy farm. Many such families exist in New Zealand – families who have worked together, who help one another, who serve the community voluntarily, who stand up for their children when they get into difficulties, and who help their members to achieve their goals.’

Peter loathes neo-liberals. It is not just a question of ACT taking up some of NZF’s potential support of the non-left who dislike National. Instructively, Peters said in his 2017 speech anointing Labour as the main party of next government,

‘Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human face.’

Earlier he had commented:

‘The truth is that after 32 years of the neoliberal experiment the character and the quality of our country has changed dramatically, and much of it for the worse.’

After all, in the early 1990s he walked out on National – his party of the previous two decades – because of his opposition to its neoliberal policies. There is no reason to believe Peters has changed in the last six years. A major factor in his approach to the Coalition Government is his opposition to neoliberalism; he sees NZF counterbalancing the ACT party and the neoliberals in National. (Despite ACT having more of the voter numbers than NZF, it has less power because a party on a political extreme has fewer options. Additionally, Peters is politically more experienced and probably politically smarter than the leaders of National or ACT. Counterbalancing is not a vain objective.)

It is not an exaggeration to see the fiscal debate that is going on within today’s Cabinet involves tensions between the extreme-right and centre-right. WPPPP’s conference speech was bringing them into the open in order to weaken the neoliberals.

A final point: Peters is indicating that he had an unhappy time in the Labour Coalition Government between 2017 and 2020 and he appears to be in difficulties with the current Coalition Government. The one other time he has been inside a coalition cabinet was between 1996 and 1998. (He was outside cabinet in the 2005-2008 Clark-Cullen Government.) In 1998 Peters fell out with Jenny Shipley, who is a neoliberal. Earlier he had got on well with Jim Bolger, who is a kind of rural working-class Tory (his farming family was not affluent) and who has also expressed doubts about neoliberalism.

How Did FTX Crash?

This entry was posted in Business & Finance, Pundit on by .

What seemed a booming success a couple of years ago has collapsed into fraud convictions.

I looked at the crash of FTX (short for ‘Futures Exchange’) in November 2022 to see whether it would impact on the financial system as a whole. Fortunately there was barely a ripple, probably because it was too small and most investors were not sufficiently integrated into the rest of the financial system to be borrowing from it to speculate on cryptocurrencies,

Subsequently its founder, Sam Bankman-Fried, was found guilty on seven charges of financial fraud. He comes up for sentencing later this month. My interest was compounded by Michael Lewis’s Going Infinite: The Rise and Fall of a New Tycoon. Lewis, who has a galaxy of impressive books including Liar’s Poker and The Big Short (which was made into a film), seemed quite taken in by SBF, as he is known. Even so, the book provides a valuable background to SBF’s career and FTX, although it was published before the revelations from the trial.

So what went wrong? FTX had some similarities to a bank. Depositing cryptocurrency with it made it easier to transact; its charges were low; it paid interest.

Banks pay interest out of the returns on loans, so what did FTX invest in? Accounts get a bit vague at this stage. At least some of the investments seem to have been in companies on the basis of capital gains. However, we know that there was a substantial commitment to an allied Hong Kong-based cryptocurrency trading firm – Alameda Research – which was given very favourable terms.

When this was discovered, and that there was around $US8b unaccounted for, the fall in confidence had customers trying to withdraw their holdings. It was like a run on a bank – FTX ran out of the wherewithal to pay them and it collapsed into ‘bankruptcy’. Revelations of fraud behaviour soon became apparent and led to SBF and some of his colleagues ending up in jail.

We really do not know just how big the FTX deficiency is; there are even claims it actually has sufficient funds. A run on a bank does not mean that the bank is broke. It may have the assets but cannot liquidate them fast enough to meet depositor withdrawals. Typically, the central bank steps in to support an approved bank – FTX was not.

We do know that the new CEO of FTX, John J. Ray III, who specialises in recovering funds from failed corporations, stated ‘[n]ever in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.’ He said there as ‘complete failure of corporate controls’; FTX’s companies had an ‘absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners’ and ‘did not have appropriate corporate governance’; some ‘never had board meetings.’ SBF agreed in court there was no risk management team at FTX, and apologised for its lack.

Cor!

Rather than detailing further the way that FTX was run, or not run, or the fraud which happened, I ask why would anybody have deposited their assets with FTX? Here are some answers to the question with a common sense response.

Everyone else was doing it. And now they too wish they hadn’t.

It was a big company. It was then, but now?

It was paying good interest. How did you know it was not a Ponzi scheme?

It involved a new innovation. So they told you. Didn’t mean it would work.

SBF was ranked the 41st-richest American in 2022. But not in 2024.

SBF had a great reputation. How many cases do you know of people with great reputations who turned out to be frauds or failures? Read Michael Lewis and, admittedly with hindsight, come away concerned about SBF’s reputation. Alameda Research’s CEO (who was romantically involved with SBF) claimed that his hairstyle and clothes were part of a ‘well calculated’ image.

Why do you trust a conventional bank enough to place your savings in it? Yes, it has a reputation above that of FTX and SBF which is also backed by competent accounting and auditing and a risk management team. Moreover, it is regulated by an independent agency (in New Zealand, the Reserve Bank) which, not incidentally, has to make sure the supervision works because it may have to bail it out. That does not mean that you will never lose (some of) your cash – (see the Deposit Takers Act 2023) – but the probability is very low.

In contrast, SBF built a reputation as an advocate for greater regulatory oversight on the industry while, as Lewis reports, avoiding it. He told a reporter it was all ‘just PR’, adding ‘F**ck regulators; they make everything worse’ and they ‘don’t protect customers at all’.

The critical notion here is ‘trust’. In the distant past there were only person-to-person transactions; each knew the other and could trust them. As the market economy evolved, transactions became between those who were not so intimately known, and eventually with anonymous persons and those who were not even persons, such as corporations. To facilitate those transactions we have public regulation. Sorry about that SBF, you need them to provide a sustainable service.

A jury found SBF guilty on all seven charges. I am not in a position to judge him on criminal fraud but some of his statements and behaviours leave me with the view he was recklessly fraudulent in any practical sense of the notion.

It is not impossible that FTX will have sufficient assets to pay out depositors (but perhaps not the interest owed). However, as one Bloomberg commentator observed, ‘“We lucked into enough money to pay everyone back” is not a legal defence to fraud’ – or a moral one.

SBF said he believed in ‘effective altruism’, which advocates choosing careers based on the amount of good that is expected to be achieved by one’s donations to worthy charities. While SBF made some claims which appeared to undermine such ethics, it is certainly true he gave a lot of money to worthy causes (and not so worthy ones, including political parties). He also gave some to friends, including his parents. I am not judging the philosophy here; one bad example does not disprove an ethical theory – as Christians will explain. But SBF’s career says something about the reality of human behaviour.

Housing Tenure And Poverty: A Note

This entry was posted in Distributional Economics, Social Policy, Statistics on by .

Note written for circulation in March 2024

This note explores housing tenure in the part of the distribution where the poverty line is, defining the line by the SNZ material hardship indicator. The note does not explore the AHC income-expenditure measure,[1] partly because there are insufficient observations but mostly because, as explained in the appendix, the measure is not very satisfactory. The numbers in the notes are only for children and do not include adults.

The statistical analysis treats the material-hardship index as continuous. The current index is not – it simply adds together responses to 17 questions about hardship weighted equally.[2] A more satisfactory index could be constructed but has not been. It would be nearer continuous. We are assuming the existing index mimics the better index reasonably well. The analysis uses linear interpolation which usually works reasonably well over the limited ranges explored here. (Critics are welcome to propose non-linear models.)

The data source is from the Table E3 ‘The material wellbeing of children in selected household contexts (6 groupings using MWI scores): HES 2018-19’ in Child Poverty in New Zealand.[3] Note that price, incomes, interest rates and rents have changed since then. Probably so has hardship.

The following table shows some key distributional statistics by tenure.

Table: Proportions in Material Hardship Categories by Housing Tenure.

<>             2018-19 Percent of Children in Material Hardship by Tenure             Tenure Total Below 10% 10-20% Owned with mortgage 48.4 14.9 29.5 Owned no mortgage 10.5   3.3  2.5 Private rental (no assistance) 17.8 15.0 18.6 Private rental (assistance) 16.0 41.8 33.2 Social Rental   7.3 25.0 16.2 Total 100 100 100

Source: Table E3, Child Poverty in New Zealand

The Table reports that 48.4% of children live in owned households with mortgages and another 10.5% of children in owned households without mortgages so almost three in five children live in homes owned by their parents (or guardians). The other two in five live in private rental accommodation with or without assistance (33.8%) and publicly provided rental accommodation (7.3%).[4]

However, the proportions are very different for those at the bottom of the hardship scale, with under one in five children (18.3%) in the bottom decile living in owned homes. That proportion increases to almost one in three (33.0%) in the second bottom decile with the mortgages proportion increasing faster than the non-mortgage proportion. The converse is close to three-fifths living in private rentals in the bottom decile (56.8%) and a quarter living in public rentals (25.0%). The proportions in rentals in the second to bottom decile fall to just over a half in private rentals (51.8%) and a sixth in public ones (16.2%).

For an illustrative exercise, suppose the poverty line was equivalent to 15% of the material hardship index. There would be 164,000 children living below this line. Of them, 17.8% are in homes with mortgages, 3.1% in homes without mortgages, 65.9% in private rentals and 23.2% in public rentals.

Suppose the 15% poverty line was reduced to 14%. There would now be 11,000 fewer children on this new poverty measure. Some 35% of them would be living in homes with mortgages and another 2% would be in mortgage-free homes. The proportions living in private rentals would be 50% and another 13% in the public rental. The proportions living near any poverty line can be very different from the total proportions living below that poverty line.

(This result is not so much a paradox but illustrates the caution that while poverty lines are a way of measuring poverty. They are clumsy. For instance, one can envisage a policy which reduced the number below the poverty line by providing extra income to those near it, funded by reducing the funds for the poorest. There are more sophisticated measures of assessing a distribution for poverty but they are neither used, nor explored, in New Zealand.)

This has been a static comparison looking at the (hardship) distribution in a given year (2018-19). The lesson for comparisons through time is that the proportions in poverty will change if the tenure groups have different experiences – in particular in the current instance, if the price of home ownership including mortgage interest rates changes relative to the price of private renting and/or the price of public renting. While this note has explored in terms of material hardship, the conclusion is equally true for income-based poverty lines.

Appendix: The After Housing Cost Measure

The MSD report also provides a similar tabulation using a measured called AHC of Equivalised Income after housing costs are deducted (Table B2). The same analysis as for the Material Hardship Index could be carried out, although it would be even further limited because fewer points on the scale are reported. The text mentions in an endnote, that the measure is a curious one consisting of subtracting an income from an expenditure – applied mathematicians warn against mixing concepts in this way.

However, there is an even more serious weakness of the AHC measure when it is used to evaluate poverty. The income less expenditure measure is adjusted for household composition by dividing by an equivalence scale. This makes the comparison between a one- and two-person household, say, more meaningful. The equivalence scales assume there are economies of scale for larger households, so they are not per capita ones (and they treat children as being less than an adult). The most important source of economies of scale is housing. Indeed, it is likely that in all expenditure other than housing the economies of scale are negligible and that a per capita scale (with a lower amount for children) would provide a better comparison after housing expenditures are deducted. However, the AHC measure uses the same strong economics of scale equivalencing factor. So I try to avoid using the AHC measure since it is obviously wrong, and in particular underestimates effective incomes (and hence poverty) in larger households which are, most commonly, ones with two adults and children.

 I have been well aware of the problem for decades. The very first equivalence scale I ever used was based on a New York needs list. When I converted it to New Zealand prices, the scale changed markedly because of the different housing prices between the two locations. I have since done a lot of work on equivalence scales (as have others) but the HRC funding agency refused to extend funding when I had been making good progress.[5] Poverty research was not its priority.

The difficulty with the BHC measures are that they do not allow for differences arising from housing costs (e.g. they treat a household with a mortgage the same as one without). The research cited in the previous endnote was exploring this issue.

Endnotes

[1] Because it is an income measure with an expenditure measure subtracted, it is not clear what it means conceptually. Which adds to the economist’s discomfort with it.

[2] It gives, for instance, the same weighting to ‘going without’ as ‘economising’.

]3] by Bryan Perry, published by the Ministry of Social Development, in June 2021 (p.69-70).

[4] The Household Survey omits those living in emergency accommodation – slightly less than 4% of all children.

[5] Carson, S. & B.H. Easton (2002) Household Equivalence Scales           

Easton, B. H. (2004) The Econometrics of Household Equivalence Scales 

How Centralised Should Our Health System Be?

This entry was posted in Governance, Health, Pundit on by .

The Government says it will give localities more control over healthcare decisions. But how?

New Zealand’s political reflex is that any problem can be resolved by further centralisation. Students will be officially banned from having cell phones at school from Term 2. The decision could have been left to individual schools. Each knows a lot more about local circumstances than the Minister of Education does (or I do). But the New Zealand way is a central directive.

On the other hand, sometimes centralisation is needed. Historically, there has been an ongoing process of consolidation of secondary healthcare. Hence cottage hospitals scattered throughout the country being slowly turned into a nationwide hospital system. Even so, there is a hierarchy among the hospitals. Today a person with a serious heart condition in Nelson – which has as good a provincial hospital as there is – is likely to be flown to Wellington.

Medicine has become more specialised and is evolving rapidly. That suggests that hospital care needs to be built on advanced medical centres attached to a base hospital. At best there is sufficient scale in New Zealand for only five centres offering the specialised levels of care which provincial hospitals are unable to provide: Dunedin, Christchurch, Wellington, Hamilton and Auckland.

Sometimes a single agency makes sense. As much as the Big Pharma are attracted to weak local purchasing, a single Pharmac works for us. Both the interdependence of tertiary and provincial hospitals and the mobility of New Zealanders means the IT configurations among health regions need to be able to talk to each other; currently they can’t.

Even so, the form of centralisation of the system in Health NZ (HNZ) did not seem to make much sense. The most widely used justification for the redisorganisation was the ‘post-code lottery’ – the access to treatment varying by region. The response has been typical of so much policy in New Zealand. A correlation was treated as causation and policy proceeded on the basis that if we abolish regional governance there will be no post-code lottery. No attempt was made to explain the disparity, although it does not take a lot of imagination to think of explanations for the differences which would not lead to a centralisation policy.

Nor does the current centralisation policy remember that while the health redisorganisation of the early 1990s was focused on competition and privatisation, there was also a concern that some areas suffered from a lack of attention from the central hospital. A positive reason for separating Middlemore Hospital from the rest of the Auckland hospital system was that South Aucklanders’ health had been neglected.

The real reasons for policy changes are often different from the stated reasons. A possible reason was that the Ministry of Health was judged to be failing and it was thought better to set up a new agency rather than redisorganise the Ministry. Possibly the shift to national pay-and-condition scales was a consideration in favour of centralisation. The redisorganisation of the early 1990s left industrial relations in the hands of individual CHEs/DHBs. Over time, that decentralisation has been replaced by a system of national awards.

One factor, surely, was that the population-based funding model was failing. It was first introduced in the early 1980s and was, at the time, a progressive attempt to move away from a rigid funding system based on historic proportions. There were later refinements but the formula appears never to have been properly adjusted for the cross-border flows of patients referred by  provincials to tertiary centres, nor for differences in population density and concentration nor for economies of scale.

Crucially, to be equitable the funding formula required that each DHB had a capital structure which generated a similar level of productivity together with the assumption that the shocks each DHB experienced were small. Both assumptions were wrong as vividly illustrated when the Canterbury DHB faced the aftermath of the Canterbury earthquakes and the Mosque Massacres. The new system is not bound by the old funding formula and may be able to refine it, although it may end up making ad hoc decisions responding to perceived short-term pressures.

The latest redisorganisation does not really address these concerns. Rather, HNZ has been charged with designing the new system. One advantage it has is that it is gaining hands-on experience, unlike most top-down organisations charged with redisorganisation. But the pressures of dealing with the minutiae of that experience may divert its attention from the overall picture. Without external pressure it is unlikely to unwind if it discovers it is overcentralised.

But is HNZ hands on enough? It has a hierarchical structure which means that, as is common among generic managers, the leadership does not connect well with the knowledgeable below. HNZ need not listen to the hospitals it runs. The new organisational structure adds at least one further managerial layer into the system.

In an RNZ interview that got overlooked in the rows over scrapping the Māori Health Authority and the existing smoking reduction policies, the new Minister of Health, Shane Reti, says he is shifting more health decision-making back to the regions. ‘There are some parts that need to be owned by the centre, absolutely, but we need to be very careful because what has happened here is we’ve lost local accountability. We’ve lost local decision making and it’s all owned by the centre.’ He stopped short of saying district health boards would be reintroduced but said IT systems and key services like radiotherapy machines were examples of what should remain centrally managed.

What the minister has in mind is unclear. Giving the local health deliverers more autonomy may sound an excellent idea but how are they to be held to account? The Minister appears to have ruled out elected boards (last introduced by the Clark Labour Government and revoked by the Hipkins Labour Government). I am not particularly sympathetic to such boards, having had friends elected to them who felt they had little influence; those with greatest integrity chose not to stand again.

Nor do I have much sympathy for the fashion of introducing targets. We have had a lot of experience with them in economics summarised in Goodhart’s Law that when one specific goal is set, people will tend to pursue that objective regardless of the consequences. An example was that when emergency departments were given a target time for processing admissions, cases were left in ambulances outside, only being admitted when the target time could be achieved. Never forget Gilling’s Law: ‘the way you score the game shapes the way it is played’.

(The government’s announced five targets are hardly inspiring. Only one addresses primary care and that – ‘95 percent of children to be fully immunised at 24 months of age’ – while worthy, ignores the numerous recommended vaccinations for adults and older children, not to mention a multitude of general practice issues.) The lack of mention of general practice will lead to the equivalent of the needy waiting in ambulances outside. 

Ian Powell’s sober assessment of targets concludes more sympathetically towards the previous Labour Government’s indicator approach than the Key-English one of hard targets.

The problem arises because a health system, like an economy, has multiple objectives which cannot be reduced to a single number in the way a business has a profit concern. (Even that gets corrupted by financial chicanery.) Simplifying the multitude to a single measure – as with the focus on changes in real GDP – is simple, foolish and distorting.

It is unreasonable to expect a new government to have fully formed its views its first hundred days – being in government and doing things is so much harder than being in opposition and criticising. It would be good if this one decides to pursue a culture change in which local generic managers focus on supporting those who deliver health care to individuals. That is a long way from a philosophy of centralisation.

Why Did Child Poverty Increase Recently?

This entry was posted in Distributional Economics, Pundit, Social Policy on by .

Not so much from a lack of nominal income but from rising mortgage interest rates

The just released Statistics New Zealand (SNZ) estimates child poverty for the year ending June 2023 show the proportions of children on nine different poverty measures are higher than they were in the June 2022 ending year. SNZ warns that the increases are not large enough to outweigh the sampling error but here I accept the conclusion as meaningful and discuss why.

(Each indicator in 2023 is below the 2018 measure, when the SNZ first began measuring. Even so, the data is not on track to hit the child poverty reduction targets set out in the 2018 Child Poverty Reduction Act.)

Some readers may find the next few paragraphs a bit tediously data (and definition) driven. If you trust the analysis – you shouldn’t without checking it – you might skip to the next italicised paragraph – eight paragraphs down – which provides a conclusion.

Average annual household equivalised disposable income (before housing costs) rose 7.0 percent between June 2022 and June 2023. The Consumer Price Index (CPI) rose 6.8 percent. Seems households are fractionally ahead?

I am now share with you a secret. The CPI does not reflect all the outgoings of households. Very importantly, it omits mortgage interest outlays. (There is a complicated story why it is omitted.)

Now mortgage interest rates rose sharply during the period. For instance, floating rates on new mortgages increased from 5.0% p.a. for the year ending June 2022 to 7.5% p.a. for the year end June 2023. According to SNZ, all household mortgage interest payments jumped 50 percent.

SNZ also produces a Housing Living Cost Price Index which includes mortgage interest payments, but it is rarely reported. According to the measure, between June year ending 2022 and June 2023 household prices rose 7.7 percent, almost 1 percentage point higher than the CPI rise. It is also greater than the 7.0 percent rise in incomes. The rise in poverty is now less surprising.

The interpretation of the household equivalised disposable income figure of a 7.0 percent rise in incomes assumes that mortgage interest payments are spread evenly through the income distribution. SNZ estimates that there are an extra 12,000 children in poverty between the two years. (This uses a poverty line based on 50 percent of median (equivalised) household incomes.)

But households with children are more likely to have mortgages, so they are likely to be hit more heavily by the rise in interest rates. SNZ also provides an estimate of the change in all household incomes if housing costs (including mortgage interest) are deducted. It showed an increase in disposable income after housing costs of 4.4 percent, well below the 7.0 percent increase of incomes before housing costs and the various price index increases. When SNZ allows for this, it estimates that there were an additional 36,000 children in poverty – the increase is as common sense would predict.

Working with a large data base sometimes results in conclusions inconsistent with common sense. Usually that is because one has made a mistake or an oversight. This column simplifies how tricky the analysis can be. I did a lot of cross-checking. I have put some of the results in an appendix.

SNZ also provides another estimate of poverty, based on asking households whether they are having to make serious cuts in their spending. On their preferred measure they think ‘hardship poverty’ among children rose 23,000, from 10.5 percent of all children to 12.5 percent. Different poverty line, different level, but a similar increase in the poverty rate.

The above analysis, and the appendix, shows that the rise in child poverty was not so much weakness in income growth. Rather the evidence points to rising mortgage interest payments.

We know why interest rates have risen. The Reserve Bank has been increasing them to restrain the economy in order to reduce inflationary pressures. (World interest rates rose in the same period for similar reasons.) I do not want here to get into the intricacies of this macroeconomic-monetary policy, but to draw attention to the way it impacts on the income distribution (as most policy changes do).

It is ironic that among the people most impacted by the policy are the most defenceless and innocent – children. John Kenneth Galbraith once said that the unemployed were employed fighting inflation; so, apparently, are children.

If you raised the issue with the Reserve Bank, I would expect it to say something like while it is aware of distributional issues, its legislation charges them with restraining inflation but has no mention of doing so fairly or taking the concerns of the weak into consideration. That, the Bank would probably say, is the responsibility of Treasury and fiscal policy; in any case it has no policy instruments to directly modify the income distribution..

We sort of recognised this when both National and Labour campaigned on raising Working for Family (WFF) payments. Note that WFF does not target families paying mortgages. It is hard to think of a viable fiscal instrument that would. WFF is intended to benefit many families with children, so a hike is likely to reduce child poverty to some extent. We shan’t know until February 2026 (and there may be other factors that will increase it).

What surprised me when I did the above analysis is that the evidence is that, until June 2023 anyway, there is not a special case that households need income tax relief. There are always demands for cuts, of course, and National campaigned on income tax cuts. It is quite likely that they had not looked at the evidence – who does? Their promise to cut income tax may be based on the ideological desire to reduce the scope of the state and increase the size of the private sector – an honourable political ideology (although not particularly mine). Thus their decision to stop indexing benefits to rising average wages, returning to indexing by the CPI, even though it will increase child poverty.

My guess as to what is currently going on in tax policy is that state sector spending is proving much harder to cut than promised and the economy seems to be deteriorating more than expected. That is going to make it much harder to deliver the promised income tax cuts within the coalition government’s promised public debt target.

If the public debt track is higher, it will be paid for in the future by today’s children. If the Reserve Bank decides that requires a higher interest rate track, it will be paid for by today’s children. If we get the macroeconomic stance wrong and unemployment rises, the income cuts will be paid for by today’s children – in part anyway. Funny, isn’t it, how often the frontline payees are the weak and innocent?

There are two appendices. One reports on the data I used in the above analysis; the second is some notes on disability and poverty.

Appendix I: Changes Between the June 2022 and the June 2023 Year

Consumer Price Index: up 6.8 percent.

Housing Living Cost Price Index: up 7.7 percent.

Household (Equivalised) Disposable Income: up 7.0 percent.

Household (Equivalised) Disposable Income after deducting housing costs: up 4.4 percent.

Ordinary-time hourly wages: up 7.3 percent.

The minimum wage up 10.8 percent (but not everyone on the minimum wage has children).

The net social security benefit for sole parent support: up 8.1 percent, and the family tax credit up by 11.4 percent (these are but representative of benefits generally).

The unemployment rate went up from 3.25 percent to 3.43 percent (or about 13,500 souls). (Some research I did many years ago suggested that incomes at the bottom of the distribution were very sensitive to unemployment, but my study focused on far bigger changes than have occurred recently.)

Appendix II: Disability and Poverty

According to the SNZ data, the proportion of children with a disability living below the poverty line (defined as 50 percent of median equivalised disposable household income) is much the same as the proportion for non-disabled children. (They are reported as about 1 percentage point higher over the last four years). However, on the measure of severe material hardship the proportion of disabled children in poverty is about two-and a half times that for the non-disabled children (5.7 percentage points).

This is no surprise. Disability generates additional expenses. We make no adjustment for this in the poverty-income measures.

We knew this when the poverty measurement paradigm was developed five decades ago. But we have hardly progressed our thinking since. Over the five decades we have never taken serious research on poverty seriously – it just has not been a research priority. The weak missing out again?

Do We Take Regulatory Impact Statements Seriously?

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The Sorry Story of Earthquake-Prone Buildings.

The Treasury requires that when new or amended legislation is proposed, a Regulatory Impact Statement (RIS) be provided – ‘a high-level summary of the problem being addressed, the options and their associated costs and benefits, the consultation undertaken, and the proposed arrangements for implementation and review’.

In its hurry to get back to the 2017 policy framework within 100 days, the new Luxon-led government announced it would not require RISs for its legislation. Perhaps the flouting of requirements could be justified if they were repealing recently passed legislation and could use the old RISs. But equally it could be argued that when it wants to, the Government ignores the whole exercise and that the RISs are only fig leaves to give the impression of quality decision making.

To see how ineffective RISs can be, look at their record on the 2016 Building (Earthquake-prone Buildings) Amendment Bill, which changed the way earthquake-prone buildings are identified and managed under the Building Act 2004. Up to 20,000 buildings may have to be retro-engineered or demolished as a consequence. The problem is particularly intense in Wellington, our most earthquake-vulnerable city, where there are almost 600 buildings on the city’s Earthquake-prone Building register.

As required when preparing legislation, the Ministry of Building, Innovation and Employment (MoBIE) produced an RIS. (Here) It is a fairly straightforward RIS until one gets to its cost and benefit analysis. CBAs are really no more than collecting together what is known about the economics of a project, in a systematic framework, typically using data from other disciplines (such as engineering). (We do not know when an earthquake will occur, so the analysis uses risk assessments provided by geologists.)

CBAs can be tricky. (Sorry folks, if this is quite demanding.) This CBA compared the cost of doing nothing to strengthen the building, against strengthening it to a seismic standard related to the New Building Standard (NBS). Here is my account based upon my reading of what the NBS rating means; where I have no expertise, I’ve had it checked out by qualified engineers.

The percent NBS rating is a measure of a building’s potential seismic performance when compared to the seismic performance of a similar new building constructed under current standards and codes. In Wellington, new buildings are designed and constructed to reliably withstand earthquake shaking with a return period of one in 500 years. A seismic rating of 34% NBS means the building should perform similarly to a 100% NBS-rated building at about a third of the level of shaking; buildings with a 34% NBS rating should withstand a one-in-41-year earthquake with a similar level of reliability. (Smaller earthquakes occur much more often than larger ones.)

The New Zealand Society for Earthquake Engineering considers buildings with a rating above 67% NBS, which can withstand a one-in-200-year earthquake, to be acceptable in terms of seismic risk. Buildings with an NBS rating below 34% are deemed to be ‘earthquake prone’ and are usually required to be demolished or strengthened.

To simplify, a 34% NBS-rated building is thought to have 10 times the risk of a human fatality of a similar new building. However, before the below 34 percenters rush out to live in a tent on the back lawn, they should observe the probability of a fatality is low.

The CBA concluded that if there was no further strengthening, the likelihood was that there would be up to 8.1 New Zealand deaths a year from earthquakes (they would tend to be clumped in particular years of big earthquakes). But if high-risk buildings were upgraded to the 34% NBS standard, there would be only 5.8 deaths in an average year. (If they were all upgraded to 100% NBS, there would be 2.4 deaths; the reason the death ratio is 2-3 times and not 10 is because many buildings are already above the 34% NBS standard.)

The figures are trivial compared to say, the annual deaths from the road toll (about 350) or cancer (about 9,500). But every life is precious, so we should try to reduce all deaths, providing the resources used cannot be better deployed somewhere else.

The CBA uses the Net Present Value (NPV) method to calculate the cost of the upgrading. It involves some heroic assumptions. The NPV calculated to upgrade all buildings to 34% NBS in 15 years was $1,717 billion. That number is not transparent so I simplify it to paying out $216m per year in construction costs for each of the 15 years.* That spending would reduce deaths annually by 2.3 (8.1-5.8). We would be spending approximately $10m strengthening buildings to avoid one death.

That is a much higher outlay than we spend in the health and transport sector to avoid deaths. We could save many more lives by spending the $216m in those sectors than on earthquake strengthening. So we are wasting money in the strengthening which could be used to save lives elsewhere.

Unfortunately, the CBA is not a very easy read, but I have yet to meet an economist who has looked at the RIS and was not outraged that legislation went ahead given its Cost-Benefit-Analysis. Economic considerations are not decisive but they should surely be taken into account, especially as the RIS alerted that there were expensive consequences.

I do not have the record of how MoBIE or the Cabinet Ministers discussed the CBA but I can tell you about Parliament. The bill got referred to a select committee, which received accompanying papers from the ministry, including the RIS as Appendix 2. Following submissions, the bill was reported back and then went through the various stages of debate until it became law.

None of the select committee members mention the RIS, nor did the minister (Nic Smith). Only one MP, ACT’s David Seymour, did. He was the sole MP to vote against the bill becoming law, primarily because of issues related to the CBA. Except for him, the CBA was wasted on Parliament.

If the MPs could ignore the costs, owners of earthquake-prone buildings could not. Many residents of affected apartment buildings are not able to afford the cost of strengthening to 34% NBS or higher and will lose their homes. Those that do strengthen have to suffer severe disruption during the construction work and are also likely to be out of pocket finding alternative accommodation (in one case I know of, for a year). Such costs were not included in the CBA.

Moreover, an earthquake-prone designation reduces the value of the building for sale. Even an engineer who understood the meaning of the NBS would be reluctant to purchase one because a subsequent sale is likely to be compromised. The Wellington apartment market is in chaos.

To round the policy story off – alas not for those owning earthquake buildings – it was intended to review the NBS in 2022. However, the review was delayed until 2027, but the incoming minister is bringing the review forward. Any revision is unlikely to resolve the difficulties that owners of earthquake-prone buildings face. These are not solely engineering matters but also involve economics and regulation and a bit more gumption from Parliament.

* I simplified by ignoring that the strengthening will also save lives in earthquakes occurring after 15 years. (I used a 10% p.a. discount rate.)