Matt Nolan

Fiscal responsibility in taxes

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With the actions of the finance minister and the RBNZ both contradicting what I have learned about sound economic management it is time for me to take to task some of the more aggressive issues I have avoided up until now.

Today, my aim is to discuss the (lack) fiscal responsibility associated with Dr Cullen’s nine years in charge of taxes.

Now, there are two ways people have stated that his tax policy is a success:

  1. Through Keynesian economic management,
  2. By increasing progressiveness.

However, if either of these were his goals – the means he has used to achieve them has not be satisfactory. Let me explain.

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Matt Nolan

Kiwisaver and savings types

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So far we have described that there is some belief that we have some problems in our capital market, this has lead to the statement that we have a “savings problem” and to solve it the government introduced Kiwisaver – which may not even increase national savings (infact it might reduce it). These articles have put us at a point now where we can ask – even if Kiwisaver does not increase national savings, could it do any good.

As mentioned in this post, our “savings problem” may not stem from insufficient savings per see, but from distributional issues surrounding our savings. As Dismal Soyanz suggests, other government policies (or insitutionalised rules of thumb) may have created a situation where savers have a bias towards relatively “unproductive” forms of investment, such as housing – furthermore, households underestimate the risk of certain assets and overestimate the risk of others. These are all behavioural biases that may exist in reality – as a result of the bounded rationality of individuals.

As a result, the purpose of Kiwisaver may be to shift the composition of New Zealand’s savings – not increase the level. Now if this is what Kiwisaver is meant to achieve we have to ask about two things – firstly, is there a better alternative. I can’t think of too many alternatives off the top of my head, so I’m going to cover this by asking, how does Kiwisaver compare to a straight income tax, where some % of the money is put aside?

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Matt Nolan

Apologises for the lack of updating

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My apologises for the lack of updating over the past few days. I am still in shock from the recent dovish MPS and the following call by Ganesh Nana (and previously by Joe Stiglitz) that inflation targeting was a failure.

In a sense I am struggling because I feel betrayed by the economics profession in New Zealand, with ANZ and BNZ both seemingly applauding the RBNZ’s dovishness. Thank goodness for Westpac, Infometrics (subscription needed) and interest.co.nz – if they hadn’t criticised the Bank’s actions I would have felt decidedly alone.

In time my shock will make way for anger, and I will effectively be going to war with our current set of economic institutions. Growing up I was proud of the way NZ was handling fiscal and monetary policy – now I have realised that we have thrown all this hard work away over the last decade.

Matt Nolan

Australia: June cash rate review and March GDP

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Before all our cash rate excitement Australia also had a cash rate review and a GDP release.

The cash rate review came first. The tone appeared similar to both the April (*) and May (*) cash rate reviews in that it was moderate. Fundamentally the statement said that as long as domestic demand showed further signs of moderating, further interest rate hikes would not be required.

Now the market reacted poorly to this – many analysts were expecting the Australian cash rate to head towards 7.75 given the prevalence of inflation in Aussie. However, I’m not sure if the Bank was saying that rate hikes were off the table – they were just saying that if the sharp slowdown in retail sales continues, true underlying inflationary pressures will fall.

However, with the labour market tight, the March GDP figures will have the RBA closer to reaching for the trigger in July.

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Matt Nolan

June 08 OCR review and MPS

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The Reserve Bank left the official cash rate unchanged today at 8.25% – inline with the expectations of most if not all market analysts. However, as always, the devil was in the detail.

Starting with the statement, the language surrounding potential cuts changed completely. In March (*) we had “the OCR will need to remain at current levels for a significant time yet” then in April (*) “the OCR will need to remain at current levels for a time yet”. However in June we got:

Provided the economy evolves in line with our projection, we are now likely to be in a position to lower the OCR later this year (*)

With the RBNZ picking an annual inflation rate of 4.7% by September they are effectively stating that if the June CPI number is weak (or even moderate), rates will be cut by July.

Further detail was in their Monetary policy statement for June (effectively their forecasts).

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Matt Nolan

Collusion, retail petrol prices, and market activism

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In New Zealand there has been an email going around suggesting that everyone should stop purchasing petrol from selected retailers (such as BP) in order to start a price war.

Now I accept that this doesn’t make much sense in the face of no collusion – which currently appears to be what is going on (h.t. No PC). However, if we did have collusion, how would this scheme work?

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