The Kākā by Bernard Hickey

TL;DR: The Government professes to take emissions reductions seriously, but has repeatedly made policy decisions in recent months that allow our …

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TL;DR: Even when young voters elect councillors and MPs they want with demands for more housing, there are plenty of forces behind the scenes able to subvert that democratic drive and re-establish the ‘democratic deficit’ behind our housing shortages for decades.

The Dominion Post’s Erin Gourley reported on Saturday via Stuff that Wellington City Council staff had quietly reinserted 797 villas into the Council’s district plan, despite express instructions from Council after a heated debate and vote last year that character zones stopping building be cut by 72%.

Paying subscribers can see more on that below the paywall fold and in the podcasts above. Should I open this up publicly later today? Paying subscribers can comment below.

News elsewhere in our political economy this morning

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TLDR: This week’s news in geopolitics and Aotearoa’s political economy covered on The Kākā for paying subscribers included:

* Treasury estimating the Government could have to spend from $3 billion to $24 billion buying carbon credits overseas to meet our Paris climate obligations, depending on the scale of our failure to reduce emissions enough and carbon prices; Tuesday’s email

* The Government loosening migration settings dramatically in a last-minute attempt to stop a systemic health system crisis turning into a catastrophe over the winter; Wednesday’s email

* The Government turning Three Waters into 10 Waters, extending co-governance and balance sheet separation in a way that gives Councils a bit more say, but takes $1.5 billion in ‘better off’ compensation off them; Thursday’s morning email and a Three Waters special in the afternoon; plus,

* The Government allowing Auckland City to delay the implementation of housing densification rules by a year because of bad weather. Friday’s email

Here’s our Notes launch special offer that ends later today.

What we talked about on the ‘hoon’

In this week’s podcast above of the weekly ‘hoon’ webinar for paying subscribers at 5pm on Friday night, I talked with co-host Peter Bale and special guests:

* Robert Patmanfrom the University of Otago from 5.10 pm to 5.30 pm or so on China practicing a Taiwan blockade, Emmanuel Macron’s China controversial comments, NZ getting closer to NATO and the Pentagon leaks;

* Rebecca Peer, a climate engineering researcher from the University of Canterbury, from 5.30 pm to 5.40 pm on the Climate Commission’s advice to the Government to actually reduce emissions and Treasury’s estimate of a $3-24b climate liability;

* BusinessDesk-$$$ columnist Dileepa Fonseka on his (paywalled) piece detailing the loss of gaming developers to Australia and a massive missed opportunity during the lockdowns to embed global gaming maestro Gabe Newell in New Zealand as a resident. 

Peter and I also talked about the Three Waters reforms and Rupert Murdoch.

Other places I appeared this week

Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues.

I appeared a a commentator for 1News as a commentator on Three Waters. I also produced my weekly When the Facts Change podcast for The Spinoff on:

The task of a generation - Aotearoa needs to double the size of its electricity industry over the next 30 years to meet our emissions reductions targets. We've done it before in 1945 to 1985 but can we do it again? With a myriad of privately and publicly owned companies waiting for market and regulatory signals, it seems unlikely. In the latest episode of my weekly When the Facts Change podcast for all via The Spinoff, I talked with electricity expert John Hancock about the prospects of doubling our power industry again.

Long story short? I think it’s going to be much harder now the ownership of these assets is so much more dispersed than from 1945 to 1985. We now have listed gentailers plus private gentailers plus private lines companies plus public-but-not-Crown-owned lines companies vs all-Crown control from 1945 to 1985. John thinks it can be done because there’s plenty of private capital wanting in on the growth.

Scoops elsewhere this week

What’s the point again? - The hydro-battery at Lake Onslow won't be commissioned until late 2037 and could take another one to three years to fill to maximum capacity, Marc Daalder reported for Newsroom from this MBIE business case document.

Wondering why food inflation is so high? - Forty six small to medium food suppliers to both Foodstuffs and Countdown told Newshub’s Janika Ter Allen last night the supermarkets are making gross profit margins of up to 55% on their products.

Chart of the week

‘It’s actually too expensive NOT too reduce emissions’

Treasury/MoE report

Quotes of the week

‘Job done…’

"I think we've nailed it. Honestly, there's a balance to strike here." Kieran McAnulty after announcing reforms to the Three Waters reforms that increased the costs, reduced the benefits, left in place co-governance and did not change balance sheet separation.

‘Yeah…nah’

“So we get $30m for $7 billion worth of assets? What an absolute crock, the whole thing.” Christchurch City Councillor Sam MacDonald.

‘What about the money you promised us’

“It's a significant change. We’d like to understand why that ‘Better Off’ funding has now been removed. The only sweetener and carrot that was there is now no longer on the table.” Waimakariri Mayor Dan Gordon on the removal of $1.5 billion of ‘Better Off’ funding, which was not mentioned in the news conference.

‘Don’t make me angry, you wouldn’t like me when I’m angry…’

“I threaten to go feral later in the year if we don’t get some marching (to Auckland) from both of the two parties, because neither of them is particularly strong on what they are going to do for the benefit of Auckland.” Auckland Mayor Wayne Brown on why he expects political parties to offer good policies for Auckland in a speech this week. NZ Herald

My weekend reading, watching & listening suggestions for paying subscribers

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TL;DR: It never rains but it pours. The Government has just had to delay moves by our biggest city to embed housing densification into its plans because of bad weather, even though densification is one of the main ways we can reduce climate emissions. We’re chasing our tail, and we’re losing.

Elsewhere below the paywall fold and in the podcast above for paying subscribers:

* the Reserve Bank looks more deeply at why interest rate cuts lift house prices;

* the Climate Commission calls b******t on the Government’s climate policies (without using the word b******t);

* Stats NZ appears to have failed again to count Māori properly;

* Food producers call b******t on Foodstuffs and Woolworths profit margins;

* Old home owners in Blockhouse Bay tell poor young families there’s no room left in their suburb for them (but they’re quite keen on all the population growth keeping their taxes low and Uber rides cheap);

* Our gross climate emissions fell for a second year because we had fewer cows, but not much else; and,

* MBIE thinks the hydro battery we need to get through dry winters with near-100% renewable power, Lake Onslow, won’t be filled until 2040, even if we decide to spend $16 billion building it, which, by the way, is way too late to help cut our emissions enough in the next eight years to meet our international obligations (and therefore avoid spending up to $24 billion on emissions credits overseas.)

What’s news in our political economy at 10 am

TL;DR: The Government has just loosened migration settings dramatically in a last-minute attempt to stop a systemic health system crisis turning into a catastrophe over the winter, just ahead of the October 14 election.

Yet again, a short-termist and reactive policy is being used to try to solve a structural problem, rather than challenging or changing the politically difficult conditions creating the problem.

This latest lever-pulling is unlikely to work, and will only accelerate our ‘churn and burn’ economic approach that sucks in as many skilled and unskilled workers as possible to replace the locally-born-and-trained renters who are opting for much higher disposable incomes after housing costs in Australia and beyond. The escape valve of residents leaving for Australia is widening under the intense pressure of low after-rent disposable incomes post-covid, and because of a more welcoming approach from Canberra (that’s about to look even more attractive).

So the Government has given in to its first instincts of adding more population fuel to the engine of our political economy. There are many signs the engine is about to blow a gasket, as I show below, and which are evident in this report issued by the Health and Disability Commissioner this morning into delays of up to four months in cancer patients seeing specialists for the first time in the Southern DHB (now Te Whatu Ora Southern).

Usually at this point in my daily email, I put the rest of it behind a paywall for paying subscribers who support my work reporting and commenting on housing unaffordability, climate change inaction and poverty reduction. But sometimes I open it up early for all to read, listen to and share immediately. I thank paying subscribers for their support and opportunity to do this, and welcome more into the community of paying subscribers here, who have access to my ‘chat’ posts and can comment below. I have made this post and podcast fully available to all today.

The escape valves whistling in our political economy

PM Chris Hipkins and his Cabinet have again adopted the same ‘fast thinking’ and reactively incrementalist approach to Aoteroa’s structural problems embedded throughout a low-wage, low-productivity, high-housing-cost and high-population-growth society. It’s an approach that avoids debates about Aotearoa’s three-decades-long ‘third rails’ around tax, public debt and size of government that both Labour and National have adopted and reinforced.

In essence, both main centrist parties running our Government have been locked in to twin fiscal guide-rails of keeping tax and public debt at or below 30% of GDP for 30 years in order to deliver regular tax cuts and keep interest rates low so median voters can get on with the real game of building their wealth via leveraged and tax-free gains on residential land. It was done on the assumption that Aotearoa already had enough infrastructure for a population that would age and flatten, but those assumptions have dissolved under the weight of the undeclared and undebated policies of the last 20 years of buying re-election, low Budget deficits and debt and nominal GDP growth through the highest migration-led population growth in the developed world.

It has worked for those homeowners and their families if they were able to leverage up enough to fund their kids’ first-home-buyer deposits to ‘get-on-the-ladder,’ all the while hoping those kids don’t blow out of the escape valve through the one-way OE and have the grandchildren overseas. The gaps are now so large between land owners and renters, and the size of the required house deposits are now so enormous, that few can kid themselves any more that anyone can viably plan to start a family in any stable or prosperous way without the help of family members or a winning Lotto ticket.

The pressure valves at our borders are whistling

So the pressure is building inside our political economy to boiling point. There are various escape valves and stress indicator dials showing it’s not working for most in the short term, or everyone in the long run. The constant drip-flood-drip of residents leaving permanently is one such escape valve. It was mostly staunched by conservative Australian PM John Howard’s 2001 move to restrict Kiwis’ residency rights in Australia. That is about to be ended by Labor PM Anthony Albanese within weeks when he is expected to announce Kiwi residents in Australia will get full rights to health benefits. No wonder Hipkins is scrambling to relax restrictions on the other side of the migration ledger.

The other signs of stress are most evident in our health system, with A&E waiting times blowing out, ambulances stuck on A&E ‘ramps’ for hours, surgery wait times gaping open, staff churn and burnout rates surging, mental health incidents and unmet need rampant, and the ultimate measures of health failing to improve. Then there’s the stress in our housing system around social housing wait lists quintupling within the last five years, a record-high prison population and growing inequality in both health and education results that correlate closely to household wealth and income.

All this works until the ‘engine’ runs out of oil and blows a head gasket. The oil for the engine is people able to work and pay enough PAYE and GST to avoid an unsustainable rise in budget deficits and debt caused by the social, environmental and health costs overwhelming the existing structures of Government. The pressure ever-downwards on Government spending and debt eventually blows out the sides in the form of labour shortages, full prisons and massive increases in unmet need for spending in health and education. Eventually, the money will have to be spent to build prisons, hospitals and barbed-wire fences, or to invest in reducing poverty. Keeping a sinking lid on a growing population with growing needs and new ways to stay healthier just does not compute in the long run.

Here’s an example from the report into Te Whatu Ora Southern’s cancer treatment services. It is a quote from a cancer oncologist called ‘Dr C’ in the report (bolding mine):

“When we had melanoma drugs funded, we predicted very clearly over the course of one to two years how many new patients we’d need to treat and what new number of clinic appointments would be needed, how many new nurses would be needed, how many more scans would be needed … and we said we need more staff to deal with this, because this is new work, and we were told ‘you have to manage within existing resource’. And so, that’s what happens repeatedly, when we make repeated business cases, make repeated presentations on the waiting list, and the staff FTE does not grow.” Dr C quoted in this morning’s report by the Health and Disability Rights Commissioner.

The main escape valve is net emigration of residents and resignations of burnt out staff from public service providers such as hospitals and schools. The warning whistles are the crises in our health, justice and education systems. Simply opening the migration throttle just puts more pressure and heat and speed into the engine. It doesn’t fix it. To do that, Aotearoa needs to fundamentally change the incentives for public and private investment in people (health, education & skills), R&D, infrastructure, housing and the environment, as well as substantially increase the scale of public delivery of health, education, transport and water.

In my view, that would require introducing a tax on unearned wealth on residential land to pay for the increased public investment funded initially by debt, and to flip the incentives for private investment away from land and towards investing in technology, skills, intellectual property and, ultimately, productivity enhancement. I’ll talk about these potential structural changes in future emails and podcasts.

So what just happened?

PM Chris Hipkins announced last night the addition of chiropractors, osteopaths, social workers, hospital play therapists & counsellors, along with 27 other health occupations, to the ‘Green List’ for work-to-residence and straight-to-residence visas, as detailed in this Immigration NZ announcement. The ‘Green List’ is the gold standard of the visas offered to workers overseas for them to come here.

Typically, we have offered temporary work visas with the assumption the need was temporary and the workers could be kicked out within a few years to avoid acknowledging the population was structurally larger and required requisite investment. However, often there was a nudge-nudge-wink-wink implication to temporary workers and international students that a permanent residency could be magicked up if the worker was compliant enough for long enough and the employer could recategorise the work as essential enough for a permanent visa. Often, the nudges and winks were either deliberately or subconciously fraudulent and abusive. They reached their extreme worst levels in the period from 2011 onwards to 2016 when there was a Government policy to double export education revenues, partly by dangling or offering residency as a carrot. It worked to expand nominal GDP with continued low wages, low interest rates and budget surpluses, but led to housing shortages and migrant abuse.

‘No more hints and winks. Give us residency up front’

Offering permanent residency up front removes almost all the risk that Immigration NZ could reject an application after a candidate has moved across the world and allows a candidate to bring in partners and children without questions being asked, and with full residency rights to education, health and welfare benefits. It is a job offer with a golden ticket attached.

Typically, the Green List has been reserved for the highest-paid and most-educated professions, especially the ‘straight-to-residence’ Tier 1 professions, which have included the likes of Cardiothoracic Surgeons, Neurosurgeons and Mechanical Engineers. There were already 57 health professions on Tier 1 of the Green List. Last night’s changes shift Anaesthetic Technician, Audiologist, Medical imaging technologist, Medical laboratory technician, Medical radiation therapist, Occupational therapist, Podiatrist and Sonographer from the ‘Tier 2’ work-to-residence visa (where an applicant has to work for two years in the role before getting residency) to the Tier 1 ‘straight-to-residence’ visa, through which residency is granted immediately. It is a job offer with a winning golden kiwi ticket attached.

Where once we only offered the golden tickets to rocket scientists and brain surgeons, we’re now offering them to osteopaths and deck hands.

Hipins also announced the addition of 32 new health roles into Tier 2 of the Green List, including (bolding mine): Addiction practitioner/alcohol & drug clinician, Audiometrist, Chiropractor, Clinical dental technician, Clinical physiologists (sleep, renal, exercise, respiratory, neurology, and cardiac), Counsellor, Dental specialists, Dental technician, Dental therapist, Dentist, Dietician, Dispensing optician, Drug and alcohol counsellor, Enrolled nurse, Genetic counsellor, Medical laboratory pre-analytical technician, Medical resonance imaging technologist, Nuclear medicine technologist, Nurse practitioner, Optometrist, Oral health therapist, Orthotic and prosthetic technician, Orthotist/prosthetist, Osteopath, Paramedic/emergency medical technician, Perfusionist (cardiac), Pharmacist, Physiotherapist, Play therapist (hospital), Social worker, Speech language therapist, and Sterile processing technician.

But wait, there’s more…

Buried amid the news about the health role additions, Immigration Minister Michael Wood also announced ship’s masters and skippers, and deck hands will be added to the sector agreement for bus and truck drivers announced in December, which now have a time-limited pathway to residency.

So why was all this needed? Essentially, Aotearoa is running out of locally skilled and trained workers in these roles and our current wage rates are not high enough to compete overseas for these workers looking to leave the likes of the UK/US/Canada/India/Europe/South Africa/China/Australia and the Philippines with other countries looking to solve their own growth and infrastructure problems such as Australia, Canada and the UK in particular. Governments are adding residency bonuses to bolster the attractiveness of wages. Our Government has to pull our residency bonus levers extra hard, given our wages are 20-50% lower than in the likes of Australia, Canada and the United States. Where once we only offered the golden tickets to rocket scientists and brain surgeons, we’re now offering them to osteopaths and deck hands. It’s not rocket surgery — it’s immigration policy and economic strategy.

A structural problem or a temporary problem?

This all makes sense in a tactical or short-term sense if you believe the problem is short term and once the positions are filled the lever can be pushed back to a ‘normal’ level. But that is debateable at best. Clearly, covid has had an impact globally, which both increased demand and supply, but Aotearoa has a particular problem with its health infrastructure (both physical and workforce) being under-resourced and under-invested for at least the last 20 years. Staff numbers and systems were put under increasing pressure by relative wage deflation, capital spending freezes and a fundamental under-investment in hospitals and clinics to keep up with population growth by Governments of both flavours.

As with any complex system, there is often some redundancy and ‘fat’ that can be found in both people and assets that can be burned when it is under pressure to ‘sweat’ those ‘assets’ as hard as possible without having to add fundamental capacity, or to reorganise to use new technology or systems. In essence, you can keep the system going for a while by shuffling things around and adding a few extra people here and there, without having to take the painfully-large capital and employment decisions to build entirely new hospitals or employ thousands of new doctors and nurses.

This is what the DHB reorganisation was partly about: an attempt to find efficiencies elsewhere in the system behind the front lines so it could cope with the extra demands without having to simply throw many more hospitals and expensively trained people at the problem.

So why not just address the structural problem?

Solving the structural problem would require a change in both the size of Government and public investment to address the underlying poverty issues causing the health crises (obesity, diabetes, under-vaccination, poor access to GPs, dental health, housing-related respiratory and skin diseases, and mental health issues at much higher rates among the poorest communities), and then to meet the unmet need with a much larger health system as a share of GDP.

It’s not rocket surgery — it’s an immigration policy and economic strategy.

That would require higher taxes and higher debt. Both National and Labour have committed to keeping taxes low and public debt low to keep dangling the prospects of tax cuts, middle-class welfare and to keep interest rates low to enable the leveraging of land values for tax-free gain.

A short term ‘solution’ to avoid a hard debate

The Government has just pulled hard on the migration lever to solve a health sector crisis that has been decades in the making because of low investment in health infrastructure, technology and training, combined with much-faster population growth than the infrastructure could handle.

Rather than invest in technology, training, hospitals, clinics or stopping the flood of poverty-related related health issues overwhelming our health system (or stopping the population growth itself), Cabinet has decided to keep the low tax and low debt guiderails in place and instead suck in more bodies to ‘solve’ a problem seen as short term and just work the existing ‘assets’ in our health and social systems even harder, with even more people.

It’s not working, simply by looking at the ‘churn’ figures on either side of the Tasman. Hipkins said yesterday there had been 3,600 applications for health sector ‘Green List’ visas since December, when the first batch of extra health industry roles were put on the list. RNZ’s Rowan Quinn reported last week the Australian Health Practitioner Regulation Agency had recorded 4,951 New Zealand-based nurses had applied for registration to work in Australia since August. That is just nurses. There are 65,000 nurses in New Zealand and Te Whatu Ora estimated last year there was a shortage of 4,000 nurses.

It is ‘fast thinking’ in a group-think way.

Here’s how this is playing out in the hospitals and clinics up and down the country right now:

Rotorua nurse Tracey Morgan had her last day at her community clinic on Thursday and was planning to go to Australia. She was emotional, staying on hours after she was due to finish to help the only other nurse working.

"I didn't realise this day would come so fast and that I'd be ... real sad," she said.

Morgan, a former president of the union the Nurses Organisation, said like many nurses who have walked away, she loved her job but was burnt out.

"I didn't want to be one of those numbers, but they're not investing enough in the nurses that are here to keep us." RNZ

Months out from an election it could lose and weeks away from a winter of jam-packed A&E departments, overflowing wards and booked-for-weeks GP diaries, the Labour Government did what every small business and voter does when under intense pressure to deliver in the short term. It went for the easy short-term fix that no one has challenged publicly and/or loudly. It is loosening migration settings to use the ‘free’ lure of residency to solve a long-term problem.

National said last night the Government should have done it sooner and harder. It is promising to pull this lever and others if it wins in October, but without any discussion about resourcing or planning for extra infrastructure or training, or what level of population it thinks should be planned for and funded.

Should we go for population growth properly, and consciously?

No one is debating whether this latest easing of migration settings, the fourth in less than 12 months, is either sustainable or a good idea. Everyone has just pointed to the queues at A&E and the staff shortages and reached for the obvious short-term ‘fix’. It is fast thinking in a group think way.

Neither National nor Labour are asking themselves or voters the basic questions of:

* how many extra people will need to be housed, transported, educated and kept healthy because of this change in policy?

* do we have the infrastructure already in place to handle that population, and what level of ‘churn’ do we want in our population (and also what level of churn will Australia accept given it is the recipient of most of it)?

* what is or should be the long-term ‘carrying capacity’ population of Aotearoa in an Asia Pacific region where 100 million rich climate refugees will want to pay to move and live here? and,

* what level and structure of taxes, public investment, public debt and size of Government are sustainable with that agreed and planned-for level of population?

In my view, Aotearoa should be debating and planning for a population of 16 million by 2100, given:

* that is what our population will grow to if we continue with the 1.5% per annum growth rate we have accidentally-on-purpose generated over the last 20 years;

* the most politically acceptable way to grow our way out of the existing $200 billion infrastructure deficit is with the help of imported workers; and,

* we may well not have a real choice, given the effects of climate change will drive those 100 million climate refugees here anyway from the likes of China, India, the Philippines, Indonesia, Malaysia and South Africa.

I will write and talk about this issue in more detail in future podcasts and emails via The Kākā. Meanwhile, I’d suggest reading this book by Nobel-winning behavioural economist and personal hero Daniel Kahneman called: Thinking, Fast and Slow.

Substacks of the day

My diary for this week

Wednesday - Stats NZ to publish NZ electronic card transactions data on retail trade for March at 10.45 am NZT. Stats NZ is due to publish its NZ Freshwater 2023 survey at 10.45 am. US CPI inflation data for March is due at 1.30 am Thursday NZ Time. Economists expect US monthly core inflation of 0.4% vs 0.5% in February and annual core inflation of 5.6% vs 5.5%.

Thursday - Australian employment data for March is expected to show jobs growth of around 20,000 (vs 65,000 in February) and an unemployment rate of 3.6% (vs 3.5% in February)

Friday - BNZ BusinessNZ Manufacturing PMI data for March due at 10 am NZ Time. Stats NZ to publish migration and visitor arrivals data for February at 10.45 am.

Next week

Tuesday April 18 - REINZ is scheduled to publish its March sales results at 9 am NZ Time.

Chart of the day

Hedonic adaptation in automotive form

Ka kite ano

Bernard

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TL;DR: Former PM Jacinda Ardern will give her valedictory speech at 5.30 pm in Parliament today. She will rightly be farewelled with affection by her colleagues and by many, including me, who admired her decisive and empathetic actions as PM during the March attacks and the first year of Covid.

I recommend watching the full uncut interview from last night on 1News with John Campbell. Ardern was an extraordinary politician who achieved so much that wasn’t expected and worked brutally hard at much personal cost, but who ultimately didn’t deliver the improvements in housing, on climate and in child poverty she promised.

My financial reckoning of her time as Prime Minister shows her Labour Government’s policies from 2017 to 2023 made home owners, business owners and the Crown itself $923 billion richer, but that none of that wealth went to renters, who have more than tripled their demand for food parcels and for social housing. In the year to June 2022, 129,100 households said they were so poor after paying their rent that they had to ask for help from a food bank. The number of renting households deemed in a stressed situation and paying more than 30% of their income in rent, has risen to 278,500 from 270,500 in 2019, the first year this statistic was collected.

There were 96,600 households in the lowest 20% of income category who paid more than 40% of their income in rent.

After tonight’s speech, she will become an upaid Special Envoy for the Christchurch Call and join the Board of Trustees of Prince William’s Earthshot Prize, which aims to protect and restore the planet by 2030.

Paying subscribers can see more detail and analysis below the paywall fold and hear more in the podcast above. I have opened this up for all immediately in the public interest. Usually the email is closed beyond this point and the podcast is only available for paying subscribers.

News in our political economy

Lucky breaks - Stats NZ reported yesterday that climate emissions fell 3.5% to 696,000 tonnes of Co2-equivalent on a seasonally adjusted basis in the September quarter of 2022 from the June quarter, although that was largely due to a 26% fall in emissions from burning coal and gas to generate electricity because we had a wet winter that allowed hydro-electric power to dominate. Also, the closure of Marsden Point helped reduced manufacturing emissions by 8.6%, but transport, postal and warehousing emissions rose 9.3%.

Jacinda Ardern’s legacy in financial and social terms

There has been a lot of debate and will be more in the hours, days and months to come about the legacy of former PM Jacinda Ardern. Her valedictory speech at 5.30 pm this evening will be a milestone in the history of our political economy. Her leadership and Government has had a massive impact over the last six years, regardless of whether voters and viewers see it as good or bad. It is not small.

In my view, her legacy as a progressive reformer of Aotearoa’s political economy in the long run is mixed at best, as even her most dedicated supporters would admit. Her pledges to be transformational on climate, housing, public transport and child poverty went mostly unachieved because they clashed with another of her pledges from before the 2017 election — to keep Government debt and taxes low — which she and her closest ally Finance Minister Grant Robertson ultimately decided the Government had to prioritise to keep Labour in power. They chose low debt, low taxes and high land prices over more affordable housing and reducing climate emissions, having promised to do all of those things together.

Labour actually reduced net debt-to-GDP, its lodestar for all policy, from 5.9% of GDP in 2017 to 1.8% just before Covid, in part by delaying investment in hospitals, public transport and housing. It has since risen to 18.9% of GDP or $71.868 billion because of Covid spending and some capital investment, although this was below a forecast as recently as December that it would be 20.0%. Labour under her successor Chris Hipkins is embarking on another belt-tightening exercise on operational and capital spending that will squeeze that net debt lower still, in part to take pressure off interest rates and to stop house prices falling. It is now working in Auckland, where auction clearance rates rose in March.

The rich got much richer and the poor got more homeless and hungrier

Ardern, Robertson and Labour had an opportunity to build back better at the height of their powers in the wake of Covid by using the Crown’s squeaky clean balance sheet to borrow more than it did, but in the end fell back on the orthodoxy of prioritising support for land values and business owners. They did it by not borrowing much more and agreeing with the Reserve Bank (Te Pūtea Matua) to force mortgage rates down to 2%, to loosen lending rules and to create $55 billion through Quantitative Easing to use the wealth effect to rescue the economy.

The Government also handed $20 billion in cash to business owners, who were ultimately able to bank that public cash privately as surplus profits in their bank accounts. Meanwhile, land owners’ values rose by as much as $426 billion to $941 billion by the end of 2021 because of the deliberate wealth-effect pumping up of the economy.

That massively widened inequality and means the number of children living in motels, families stuck on public housing waiting lists and people forced to use food banks are now vastly higher than in late 2017 when Labour won power, even though household net worth rose 37% or $613 billion in that time to $2.25 trillion.

Also since late 2017, Government gross debt rose from 29.8% of GDP to 36.3% of GDP by the end of February this year. Its new net debt measure has risen from 5.9% of GDP to 18.9% of GDP and remains 11.1 percentage points of GDP or $42.2 billion below Labour’s new self-imposed debt ceiling of 30% of GDP. In net worth terms, the Government presided over a rise in its own reported net worth from $110.5 billion or 40.1% of GDP to $172.1 billion or 45.3% of GDP. That was largely due to land revaluations after the 2017-21 residential land value boom and an increase in the value of its electricity generator/retailers because they became more profitable.

The bottom line for public and private balance sheets

In summary, Stats NZ National Accounts data show Ardern’s Government chose a set of policies that:

* increased the net wealth of land and asset-owning households (ie not renters but including landlords) by $613 billion to $2.25 trillion;

* increased the net worth of housing landlords by $111 billion to $315 billion;

* increased the equity in non-financial businesses (ie excluding banks) by $248 billion to $1.222 trillion;

* increased the net worth of the Government itself by $61.6 billion to $246 billion, including a $35.3 billion increase in land values to $85 billion and a $4 billion increase in the value of the Government’s 51% shares in Meridian, Mercury and Genesis to $19.8 billion; and,

* increased annual nominal GDP rose by $120 billion a year to $394 billion, while the population also rose from 4.9m to 5.2m.

That looks a fine financial and economic legacy until you take a closer look at the situations of those who did not and could not take part in that wealth creation: renters and future generations. Their wellbeing went backyards in terms of net worth now and actual future net worth, largely because the future liabilities of climate emissions credits and costs, future health costs, education and justice costs, and future lost productivity costs, are not accounted for in the Crown’s net worth statistics. Treasury does not measure such long-term costs, either because it deems it too hard, not possible, or has not been directed to do so.

Skimping on investment to pull wealth forward to voters now

Just as in a business that skimps on future investment will accumulate a large liability for deferred maintenance or an erosion of intangible assets such as brand value, the Government should see its net worth decline if it decides to increase its ‘dividends’ today in the form of low taxes (or even tax cuts) and reduces its investment in infrastructure and public assets such as health, education and productivity.

This reckoning of the last six years shows that the Government again pursued policies that made homeowners and business owners much wealthier now, effectively by not investing enough in public infrastructure for housing and transport in particular to catch up with both past under-investment and population growth. The burden of that under-investment in housing, public transport, health and education is falling on the young and poor of today and tomorrow, who will have to deal with the unaccounted-for costs of climate change, high child poverty and lost productivity gains linked to poorer public health and the effects of unaffordable rental housing. It is a case of robbing young Paul in the future to make old Peter now much richer.

In effect, Ardern’s Government did what the Governments over the last 35 years have done. They first lowered public debt and taxes as a share of GDP because they saw no need to keep taxing and spending so heavily to invest in an economy (in 1984) that was already ‘over-invested’ and over-indebted with Think Big projects and their debts. They retained that low debt and low tax stance (debt/gdp and tax/gdp to stay at or below 30% of GDP) from the mid-to-late 1990s onwards and then bought nominal GDP growth and re-election by sweating the existing public infrastructure to breaking point and juicing nominal GDP growth with un-debated population growth.

Parliamentary Exchange of the day

My longer reads and listens of the day

My diary for the week ahead

I’ll update the news on these through the day in the chat section of the app.

Today’s highlight is Jacinda Ardern’s valedictory in Parliament

In politics and Parliament:

* Question Time begins at 2 pm;

* The General Debate in Parliament is held from 3 pm;

* Debate on member’s bills is held after 3 pm;

* General Debate in Parliament from 3pm; and,

* Former PM Jacinda Ardern will give her valedictory speech in Parliament at 5.30 pm.

In the economy:

* Reserve Bank (Te Pūtea Matua) is scheduled to announce at 2pm the decision of its Monetary Policy Committee on the Official Cash Rate, with economists and financial markets broadly expecting a second-to-last 25 basis point hike to 5.0%;

* RBA Governor Philip Lowe is scheduled to give a speech on Monetary Policy, Demand and Supply at the National Press Club in Canberra around 2.30 pm NZT

* The RBA delivers its half-year Financial Stability Review at 1.30 pm NZT

Thursday’s highlight is that it’s the last day before a holiday

In politics and Parliament:

* Parliamentary Question Time for Ministers begins at 2 pm NZT

In the economy:

* ANZ publishes Commodity Price Index for March at 1 pm NZT

Friday’s highlight is that it’s a public holiday

In the economy:

* US non-farm payrolls and hourly earnings data for March is due at 1.30 am Saturday morning, with economists expecting monthly jobs growth of 238,000 (down from 311,000) in February, and unemployment flat at 3.6%.

Substacks of the day

The Craic

A fun thing

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week’s news in geopolitics and Aotearoa’s political economy covered on The Kākā for paying subscribers included:

* revelations that the Reserve Bank (Te Pūtea Matua) is paying billions per year in interest to the big four Australian-owned banks, as well as providing $19 billion of subsidised loans to them at a time when the Government more broadly is refusing requests for extra spending on health, education, transport and welfare (Monday’s email);

* Reserve Bank analysis released this week showed 25% of Auckland homes with mortgages could be affected by rising sea levels and/or a 1-in-100 year type of storm, with some vulnerable to a complete wipeout of their values (Tuesday’s email);

* the Government backtracked on various climate pledges as it battens down its ‘costs of living’ hatches before the election, including inviting oil and gas explorers to submit more bids for drilling onshore and quietly not introducing emissions standards to improve engine efficiency and vehicle safety for six years (Thursday’s email); and,

* the Government announced five options for an earlier second crossing/s (either or both a tunnel or bridge) of the Waitematā harbour that prioritise cars, could cost $25 billion and would significantly increase climate emissions during their building and/or drilling (Friday’s email).

What we talked about on the ‘hoon’

In this week’s podcast above of the weekly ‘hoon’ webinar for paying subscribers at 5pm on Friday night, I talked with co-host Peter Bale and special guests:

* Robert Patmanfrom the University of Otago about New Zealand joining Aukus-lite and the dramas in Israel from 5.15 to 5.30pm;

* University of Victoria Public Policy academic Andrew Ecclestone about the need to regulate lobbyists and revolving doors for bureaucrats, politicians and political operatives, along with the need for OIA reform in the wake of Stuart Nash’s departure from Cabinet from 5.30 to 5.45pm; and,

* Simplicity CEO Sam Stubbs talking about Simplicity Living’s big house building plans, starting in Auckland, and banks receiving billions of subsidies from the Government from 5.45 to 5.55pm.

Peter and I also talked about the demise of TodayFM and Donald Trump’s indictment early in the show, and Peter introduced his cousin’s dog Banjo to the audience at the end. Cute dog.

Other places I appeared this week

Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues.

I produced my weekly When the Facts Change podcast for The Spinoff on: The climate landmine in your letter box.

Cyclone Gabrielle suddenly showed us the life savings invested in the land under a home can dissolve as soon as an insurer decides to reprice or pull their insurance. I talked to insurance and banking academic Dr Michael Naylor from Massey University about how insurers are rapidly repricing for flood risk in a warming climate, and how that’s creating a Wild West for home buyers hoping to know if their life savings will dissolve too.

This week’s scoops elsewhere

Guyon Espiner’s ‘Mate, comrade, brother’ series of articles and videos for RNZ last week and early this week on the activities of lobbyists with the Labour Government and the need for regulation was essential reading.

Kirsty Johnson reported for Stuff yesterday on how the Government had changed the law about compensation for wrongful convictions for those who had served home detention sentences, after her earlier reporting on the issue.

Luke Malpass reported for Stuff on Tuesday from an email that showed Stuart Nash leaked details of a Cabinet decision to a donor, Troy Bowker, prompting PM Chris Hipkins to immediately sack Nash and launch an inquiry.

Pete McKenzie reported for Newsroom on Thursday about how his 2021 requests for all emails between Nash and his donors led to the exclusion of the smoking gun email, potentially in breach of the law and with the knowledge of the office of PM Jacinda Ardern, but not necessarily the PM herself.

Jenee Tibshraeny reported for NZ Herald-$$$ from documents obtained under the OIA about how the Reserve Bank is paying billions in interest to banks and how Grant Robertson had asked to see whether the Reserve Bank could cut back on that.

Marc Daalder reported for Newsroom on Wednesday about how the Government quietly sat on proposals to improve engine efficiency and car efficiency standards for six years at a potential cost of billions to the country and thousands of tonnes of extra climate emissions.

Charts of the week

Quotes of the week

‘Hey mate…’

“Stuart Nash and discretion are not words that get used together much in the same sentence,” Troy Bowker said of Stuart Nash, via BusinessDesk-$$$ this morning, albeit after saying he still liked Nash as a friend.

‘I have some breaking news…’

“They have f*cked us. And we’re all going to lose our jobs.” Tova O’Brien revealing on-air on Thursday morning that MediaWorks was shutting TodayFM.

Profundities, spookies, curiousities and feel-goods

Cartoons of the week

The Craic

Fun things

Ka kite ano

Bernard

Thank you for reading The Kākā by Bernard Hickey. This post is public so feel free to share it.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: Once a year, every year, from now on, in our not-so-slow-cooking climate crisis, there will be a moment when the most important number in Aotearoa’s own personal, national and financial economies could implode. It is the day when the annual home insurance renewal letter arrives to advise there will be no renewal.

Reserve Bank (Te Pūtea Matua) analysis released this week showed 25% of Auckland’s homes could be affected by rising sea levels and/or a 1-in-100 year type of storm, with some vulnerable to a complete wipeout of their values. It also showed a ticking time bomb underneath those home values that could go off once a year, rather than whenever the home has to be remortgaged or sold. But luckily, for the economy, the bank regulator found our banks are strong enough to cope with any devaluation shock/s, although those owner-occupiers and landlords stuck with unsaleable properties face decades of repaying a loan they’ll never be able to clear with a sale, unless they can convince a Government or Council to buy them out at pre-flood land values.

Those home owners with loans, but without insurance, face a type of never-ending zombie climate apocalypse — locked in to repay the mortgage and unable to move without being wiped out financially, and facing the risk of being wiped out physically in a flood or storm surge. Unless they can flick on their timebomb to someone else without the information or belief that it can happen to them, or perhaps the confidence there will always be a taxpayer or ratepayer to buy them out because they are special. They can then try to argue they didn’t know and couldn’t imagine their home was at risk, and that the letter in the mail from the insurer was Act of God.

An economy with a climate landmine underneath

We’ve suspected it for years, but no one had ever compiled the overlays of the flood plain maps, the bank mortgage portfolio maps, along with estimates of the possible climate events and the resulting potential losses for homeowners, banks and insurers.

Now the Reserve Bank has done it for the first time, if only for Auckland. It has published its first 13-page 2022 Flood Risk Assessment for Residential Mortgages paper in its latest bulletin, which has started the process of lining up the climate forecasts, the bank loan book maps and the projected flood and sea level changes on those maps. Think of the exercise as a bit like combining the valuation maps in Homes.co.nz with the flood plain maps at NIWA and the five spreadsheets with addresses and mortgage balances from the biggest banks.

It is the map that shows who is sitting on climate landmines, and how much it might hurt when they are triggered by a flood or a re-valuation, or most likely, a letter in the mail.

The results are sobering, if only because they signal this is only the beginning of the process because the analysis does not include all the data on risks in all of our housing markets, which (I would argue) make up the engine rooms of our economy (with bits tacked on).

The key things to know from the report are:

* nearly 25% of mortgages in Auckland are deemed at risk in a 1-in-100 year flood event;

* possible provisions for bank losses could rise as high as $1.3 billion in the most severe events, and that estimate is for only half of Aotearoa’s mortgages because it covers only mortgages in Auckland (which has half of the motu’s home loans); and,

* the trigger moment for a loss of value in a home (or more accurately the land value under the home) is more likely to be the annual insurance rollover event, rather than a sale and/or re-mortgage event.

For me, this was the most chilling bit of the paper (bolding mine):

Insurers generally issue insurance cover on a 12-month term, meaning that annually they can re- evaluate a policy based on any new information or understanding gained regarding the risks associated with a property or area, or a change in the cost of re-insurance.

A change in the affordability or availability of insurance could trigger a fall in property values, as reduced insurance cover would shift greater risk onto homeowners and lenders. This could occur quickly given the annual insurance cycle.

Other factors that could see decreases in flood-affected property values include greater homeowner awareness and risk aversion when buying a property in a flood zone, lower rental income, a sudden increase in flood zone properties for sale in anticipation of future events, or a reduction in the quality and provision of key infrastructure in flood-affected areas. Reserve Bank Bulletin paper.

Beware the letter, rather than the flood

What this means is that the first a homeowner will know their family’s savings have been wiped out and they can never sell for a decent price is when they open the letter from the insurer telling them they have either made the premium unaffordable, or their home is uninsurable. The trigger is not the flood. It is the moment when an analyst or risk manager at your insurance company recalculates the damage costs for your property after a fresh set of NIWA forecasts and maps, or a fresh reinsurance deal. It will be like a neutron bomb where the only sign it has gone off is the letter from the insurer regretting to inform the customer that their home is either uninsurable, or the premiums are so expensive that it may as well be uninsurable.

Anyone wondering what that feels like or looks like should talk to the owner of a Wellington apartment deemed earthquake prone with the swipe of a mouse in the years after the Christchurch and Kaikoura earthquakes.

The caveats and other ways the numbers could be bigger

But this is just the beginning because the Reserve Bank made clear in its paper that it only analysed the detail of the mortgage books and flood maps in Auckland, which is actually less at risk in percentage terms than Christchurch and Wellington, and did not include the Hawkes Bay, which had the biggest risk of flood damage to homes.

The analysis was also done before Cyclones Hale and Gabrielle and did not include any coincidental and quite likely changes in economic conditions from climate events, including unemployment. The prices used were also in March 2022, before a 12% fall in prices nationally wiped out some of the buffer the banks could rely on before having to provision for losses. The Reserve Bank will re-do the numbers later this year in its 2023 Climate Stress Test of bank books, which may be made public in or around its November 2023 or May 2024 Financial Stability Reports.

Here’s the other caveats from the Reserve Bank, none of which would make the numbers smaller:

Since then, house prices have fallen and mortgage rates have risen, making customers more vulnerable to the shocks considered in this exercise if we were to re-run it today.

We will explore this in our 2023 Climate Stress Test and are using these sensitivities to guide our scenario design.

Additionally, we are aware that flood risk is only one channel of financial impact that may be borne from climate change at the coast. Coastal erosion, for example, is not in scope of this exercise but is a climate-related risk we will consider incorporating in future.

Nor were the effects of loss and damage of key infrastructural assets such as road and rail links, electricity and communications transmission hardware, and storm and wastewater drainage systems, which are often located within zones vulnerable to acute coastal inundation impacts.

So what could these second round effects look like? The Reserve Bank gave a helpful comparison:

In this respect, the infrastructural damage caused by Cyclone Gabrielle may offer a window on the wider community and economic impacts of acute events which financial institutions may learn important lessons from.

So what did the analysis include?

The Reserve Bank asked the banks to use the current (ie not updated with Hale or Gabrielle data) 1-in-100 year storm tide level at each sea level when defining a flood zone, which doesn’t itself adjust the scale of the 1-in-100 year event for a changing climate. Banks also used different versions of maps, suggesting better ones may well generate bigger numbers.

This means we are not capturing a change in the size or nature of the storm surge due to change in climate. However, the hypothetical changes in insurability and prices of properties in the flood zone are severe enough to be consistent with increased frequency of the storm tide event.

Banks used flood maps matched to location data to identify ‘at-risk’ properties in their residential mortgage portfolios. We asked that a property be classified as ‘at-risk’ if any part of it sits within the flood zone. However, in an attempt to support the ongoing capacity building of the banks, we did not specify use of a particular flood map for coastal zones or the type of spatial data set; this leads to some variation in the data and approach between participants.

The analysis found that 2.5% of the total dollar value of residential mortgage lending was exposed to the coastal flood zone with 50 centimetres of sea level rise. It rose to 3.8 percent in a more severe outcome with 1 metre of sea level rise. The banks’ data showed that with 50 centimetres of sea level rise, Christchurch contributed 22% of the national exposures, followed by Wellington with 14%. The data for Hawkes Bay found 15% of lending was exposed to a 50 centimetre sea level rise and 20% to a 1 metre rise.

The analysis found, understandably, that those homes closest to the sea were more likely to see their total value wiped out if seal levels rise by one metre.

The Reserve Bank used the estimates from the IPCC of potential sea level rises with various levels of warming.

The Reserve Bank asked the banks to calculate loan loss provisions for mortgages affected in the flood zone, taking into account customers’ ability to service the loan and changes to the underlying value of the property.

Loan servicing is the key and explains why the potential bank losses are much, much lower than the potential loss in property values. The banks will be able to enforce its contract specifying the owner must pay the mortgage, regardless of the value of the property, as long as they have a job. Owners can be wiped out financially in wealth terms, but as long as they have regular income, the bank will be fine.

The impact on capital is small due to the low number of properties exposed to coastal flooding risk. The aggregate CET1 (common equity tier one) ratio declined by only 16 basis points (0.16%) for the most severe assumptions.

The results do not assume any increase in the unemployment rate that would occur during an economic downturn. If there was a period of elevated unemployment coinciding with these property price falls, the risks would compound and we would expect the effects of the assumed price declines for at-risk properties on banks’ provisions and capital to be significantly greater.

This exercise shows that if sea level rise were to be the only impact of climate change facing them, our largest five banks, given current balance sheets, would be resilient to rising sea levels and hypothetical severe falls in affected property prices. Given that even at our most extreme sea level less than 4 percent of mortgage lending is exposed to the 1-in-100 year storm tide, we would expect this level of resilience.

Even in the most severe scenarios, bank capital levels fell just 41 basis points.

Even rising sea levels plus big floods won’t damage banks too much

The Reserve Bank also asked the banks late last year to assess their sensitivity to a major rainfall event in Auckland. Some of the economists there should perhaps become weather forecasters.

As with the coastal sensitivity results, the Auckland rainfall sensitivity shows that flood risk driven changes in property values would affect the capital profile of the largest banks in Aotearoa New Zealand, but not to a degree that threatens their solvency or business model. However, these provisioning expenses would reduce bank profits, and potentially dividends. Moreover, if flood risk went unmitigated this would, however, put entities in a position where they are more vulnerable to other shocks such as an economic downturn.

But wait, there’s more

The Reserve Bank’s main conclusion was that simply modelling the affects of the storms and rising sea levels on their own would not be enough.

We are also aware that as flood risk increases, the financial system is likely to face simultaneously a broader range of climate-related risks: domestic transition risks from factors such as more stringent emissions pricing; transition costs transmitted internationally, for example shifts in market preferences or diminished market access through mechanisms such as border taxes; and the longer term effects of the increasingly severe chronic and acute physical impacts of climate change on the reserves of adaptive capacity in the wider economy and the financial system. Our forthcoming Climate Stress Test will be designed to improve our understanding of the combination of climate-related risks to banks’ balance sheets.

So this won’t be the last of it, as note 13 in small print at the bottom of the last page spelled out with the most clarity and foresight:

This will be a stress test against a multi-decade scenario involving physical and transition risks across various parts of banks’ businesses; for example, flood risk will affect commercial property and agricultural borrowers as well as residential property. The stress test scenario will include acute flood events, unlike the sensitivities presented here.

Get ready for the letter that triggers the landmine

These climate stress tests will be annual or semi-annual events of interest to climate finance geeks like me, ratings agency analysts, bank investors and regulators. Of themselves, they won’t matter much to home owners or the economy at large. They are worth watching, but not with a sense of dread or urgency.

That should be reserved for the mail box. And the letter with the cellophane window showing a friendly insurance company logo.

Meanwhile, the drums will beat louder for some sort of subsidised flood insurance or managed retreat where the taxpayer at large steps in to help land owners retreat, largely by paying them much more than their land is worth, or takes on the risk of repairs and replacement for bigger and more regular floods.

That again raises questions about the winners and losers. Renters will end up paying through their income and GST taxes to ensure owners of land endangered by climate change that we all know about and understand now can be rescued from ‘acts of god.’

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The taxpayer is set to pay banks upwards of $3.3 billion in interest costs on over $53 billion of cash balances they’ve built up in settlement accounts at the Reserve Bank since covid, Jenee Tibshraeny has revealed in a NZ Herald-$$$ scoop this morning from documents obtained under the OIA.

Financial Minister Grant Robertson considered forcing the Reserve Bank (Te Pūtea Matua) to pay banks a lower interest rate than the official cash rate they’re currently being paid. Cutting the interest rate would in effect be a type of bank tax. But the Government has appeared not to proceed with the idea after Treasury and the Reserve Bank said it was worried the banks would in turn reduce their own interest rates on term deposits, which would frustrate its efforts to encourage consumers to save more with banks and thus reduce inflationary pressure.

I include more detail and analysis in the podcast above and below the paywall for paying subscribers

Why ‘hard-working kiwi taxpayers’ pay banks billions

Cheap loans and expensive cash accounts - So it turns out the taxpayer is not only subsidising already-very-profitable private banks with $19 billion of cheap ‘Funding For Lending’ loans that helped pumped up house prices in 2021, but taxpayers are also paying the banks upwards of $2 billion a year in interest for cash banks have to keep with the Reserve Bank. Most regular savers aren’t paid interest on cash accounts with these banks, but the Reserve Bank is paying.

Meanwhile, the Government is skimping on wage settlements for teachers and nurses, delaying infrastructure projects, restricting drug funding and refusing demands from child poverty activists for incomes for beneficiaries and poor families that even the Social Development Minister Carmel Sepuloni acknowledged yesterday (via Q+A) did not allow poor people to live in dignity.

How can the Government argue with a straight face from now on that it has no choice but to cut funding for transport, health, education, climate change, benefits and infrastructure, when it is providing billions in subsidies for bankers and effectively transferring wealth from savers and renters to home owners.

It’s all about the QE in 2020 and 2021

This is a direct result of the $55 billion worth of Quantitative Easing or money printing that the Reserve Bank did in 2020 and 2021 to stimulate the economy during covid. The bank created the $55 billion to buy Government bonds from banks and pension funds in secondary markets. That cash was then deposited by banks back in settlement accounts with the Reserve Bank in a type of merry-go-round. The Reserve Bank then pay banks interest on the balances of those accounts at the Official Cash Rate. Reserve Bank data shows those settlement accounts now have over $53.97 billion in them and the Reserve Bank is paying the OCR now of 4.75%, meaning the interest costs are now running at over $2.56 billion per year.

Documents from the Reserve Bank released to NZ Herald-$$$ reporter Jenee Tibshraeny under the OIA show the Reserve Bank is expected to have to pay $3.3 billion in interest on these balances by 2027. Those documents also show the Government looked at cutting the interest rate to zero, as suggested by former Bank of England Deputy Governor Paul Tucker in a paper into the issue in October last year.

Finance Minister Grant Robertson then sought advice on whether the cash settlement rate could be cut here as an effective form of bank tax. The Reserve Bank advised against it, saying it might lead to the banks cutting term deposits for private savers, which might encourage more of them to spend and add to inflationary pressures. It was also concerned the move would suggest the Reserve Bank was too cosy with the Government.

Here’s more detail in Jenee’s article, which is a follow-up to one she did in October last year (NZ Herald-$$$):

Documents released to the Herald under the Official Information Act (OIA), show Robertson explored whether the RBNZ could save the Crown money by paying banks less interest on the settlement cash they keep at the RBNZ.

The RBNZ currently pays banks interest at the official cash rate (OCR) on their deposits at the central bank, used to settle transactions with each other, the RBNZ and the Crown.

The issue, from a public finance perspective, is that programmes the RBNZ used to lower interest rates in 2020 and 2021 – the Large-Scale Asset Purchase programme and Funding for Lending Programme – saw the balances of banks’ settlement accounts rise seven-fold to $49 billion. (This was by the time of the advice. They were $53.97 billion by the end of January)

These balances are expected to fall as the programmes are unwound. But in the meantime, the RBNZ is paying increasing rates of interest (the OCR is 4.75 per cent and expected to rise further) on a large sum of money.

‘We don’t want the banks to then pay their savers less’

Jenee then quotes from advice provided by Reserve Bank Deputy Governor Christian Hawkesby, who in November NZ Herald-$$$ he opposed the concept, fearing it could hamper the transmission of monetary policy.

He worried paying banks less interest while trying to get them to lift their mortgage and deposit rates could complicate things.

He said the RBNZ’s priority was to lower inflation in line with its mandate, and if the aim of paying banks less interest was to effectively tax them more to help pay for the Covid response, then that was a matter for the Government to consider.

Jenee reports the Treasury briefed Robertson on the issue in November.

It estimated that paying banks no interest on half their settlement balances could save the Crown $3.3b by 2027. But it said that if the Government wanted to tax banks more, it should consider doing so using a different approach.

Changing the rate of interest paid on banks’ settlement balances would produce a volatile revenue stream that would vary depending on the OCR and the size of banks’ balances.

The Treasury also noted the impact the change could have on the implementation of monetary policy and said it could affect perceptions around the RBNZ’s independence.

It suggested Robertson seek advice from the RBNZ if he wanted to further explore the matter. So, he took the issue to the RBNZ, which reported back to him in February.

The Reserve Bank again said it opposed the idea.

It feared paying banks less interest on part of their settlement accounts could prompt them to lower interest rates at a time the RBNZ wants them to keep rates elevated to dampen inflation. It noted paying banks interest at the OCR “creates a floor under short-term market interest rates”.

The RBNZ recognised that both it and other central banks have in the past paid banks different rates on parts of their settlement balances.

But because, in the current environment, this wouldn’t help the RBNZ meet its inflation target or make the financial system more stable, changing the system would be counterproductive and make it look like the RBNZ was too cosy with the Government.

“It would be unprecedented internationally for an advanced economy central bank to introduce tiers for reasons unrelated to their own objectives,” the RBNZ said.

“This policy would amount to a tax on a specific section of the financial sector, which RBNZ lacks public legitimacy to make decisions around and would be in tension with RBNZ’s other objectives.”

Jenee then quoted a spokesperson for Robertson saying: “The minister has not requested further advice on introducing a tiering system at this time”.

Bank tax? Or just no subsidies?

In my view, this is a no brainer. The Government needs to recover something from the banks to offset the billions being paid via the Reserve Bank in effective subsidies via cheap loans and expensive cash settlement account interest costs. The simplest and easiest way is for the Reserve Bank to not pay interest on settlement account balances. Then it should unwind the Funding For Lending Programme loans as quickly as legally possible.

Yes, it may see the banks lower their term deposit rates on savers and force the Reserve Bank to have a higher-OCR-than-would-otherwise-be-the-case to control inflation. That would probably mean slightly higher interest rates for mortgage rates than would otherwise be the case. This makes clearer what is going on here: term depositors without homes and non-home-owning taxpayers (ie renting workers) are subsidising mortgages for home owners and investors, and the profits of bank shareholders in Australia.

How can the Government argue with a straight face from now on that it has no choice but to cut funding for transport, health, education, climate change, benefits and infrastructure, when it is providing billions in subsidies for bankers and effectively transferring wealth from savers and renters to home owners.

It would also be nice to see National and ACT come out against corporate welfare and the use of ‘hard working taxpayers’ money in a way that shifts wealth from renters and savers to homeowners and bank shareholders. Would National and ACT protest if billions of taxpayers dollars were seen to be unfairly going to iwi or beneficiaries or ‘wasteful bureaucrats and consultants’?

When lobbying is unregulated and doors revolve fast

Unregulated lobbyists - Guyon Espiner extended his series of investigative reports on RNZ on Saturday into how lobbyists do their thing in Aotearoa. It is enlightening on the issue of how pine forests are still in the ETS, despite attempts to lever them out. Neale Jones and his work for NZ Carbon Farming (NZCF) is the subject in this one.

In the end, NZCF, which didn't respond to a request for an interview, got what they wanted. The government did a U-turn on its initial proposal and exotics, such as pine, will remain in the ETS.

The government now says a "redesigned" category for exotics could come into effect in January 2025. Guyon Espiner via RNZ

He makes the great point that Aotearoa is an outlier without regulation for lobbyists and no rules on revolving door hiring of bureaucrats, politicians and political operatives alike.

Out of 41 countries analysed, New Zealand was one of nine to have no law restricting movement between top government jobs and the lobbying industry.

In Australia departing ministers cannot "engage in lobbying activities relating to any matter that they had official dealings with in their last 18 months in office".

Heads of government agencies, senior public servants, ministerial staff and even defence force staff (at colonel level or above) face a 12 month cool off period before they can join lobbying firms.

Canada has a five year stand down period; Spain two years and Germany 18 months.

In New Zealand, cabinet ministers can go straight into lobbying jobs, taking knowledge, information and contacts to be leveraged in the commercial sector. Guyon Espiner via RNZ

Lobbyists should be regulated and the revolving door dismantled

Again, this is a glaringly obvious thing that should be done to maintain public confidence in Government. Labour politicians like to talk about social license, but when it’s clear this month’s ‘policy bonfire’ included a bunch of policies on alcohol harm, recycling and climate change that lobbyists effectively blocked, then there is a problem.

Is it any wonder the status quo is so powerful under MMP and there is little real action to deal with climate change, housing affordability and poverty? The interests that benefit from slow-to-no-policy-change have paid for close and fast access to those trying to change policies.

Here’s the best (and only) source of organised information on who is a lobbyist in Aotearoa. It is Parliament’s approved visitor list for Parliament, which is a list of lobbyists given swipe cards by operatives.

Other scoops and notables this morning

Just imagine if it was free? Demand for dental work has skyrocketed since the Government rose the grant cap from $300 to $1000 for people on low incomes and benefits, with nearly $15 million paid out in three months, Michael Neilson reported for NZ Herald this morning.

Useful reports and research

Housing quality, cost and precarity in Queenstown - Here’s the latest Queenstown Lakes District Council annual quality of life survey results, which show 5% of the population have used emergency accommodation in the last year, 16% don’t have a steady place to live, 26% either couldn’t afford to heat their home at all or not much, and 20% were forced to move by: an expiring lease, the landlord was selling the home, the home was mouldy and/or cold, they bought a home or their home was being turned into a rental. It came out on Friday.

This quote from a respondent to the survey stood out for me:

“We are about to have our first child and have had to move at least every 12 months due to either affordability, unhealthy home, and recently away from shared housing. We are genuinely concerned about our end of lease date in March 2023 and whether we can find a healthy, affordable home for us and our new born baby within the district. It also makes it difficult to plan for enrolling in child care as we don’t know where we may be living year to year. We would like to purchase our own home for long term living but as all properties available for sale are up for auction we are unable to adequately put aside a set budget.” Queenstown Lakes District Council annual quality of life survey results

The Housing and Urban Development Ministry (HUD) released a report last week: Evaluation of whānau experiences in contracted emergency housing in Rotorua. The report generally says the use of motels is positive, but not a long-term solution. This quote stood out for me:

Housing is both a cause of detrimental health, education and social outcomes and also a solution and catalyst to wellbeing. HUD report: Evaluation of whānau experiences in contracted emergency housing in Rotorua

Chart of the day

Who benefits from inflation over time in the United States

Blair Fix has written a fascinating paper on the winners and losers over time from inflation, and how the battle and arguments over inflation is as much a political struggle over the shares of income as it is an economic one.

Profundities, spookies, curiosities and feel goods

Cartoon of the day

Ka kite ano

Bernard

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TLDR: This week’s news in geopolitics and Aotearoa’s political economy covered on The Kākā included:

* The runs on Silicon Valley Bank and First Republic Bank on the west coast of the United States that forced the US Treasury, FDIC and Federal Reserve to intervene to promise full payouts to depositors, over and above the US$250,000 deposit guarantees legislated for, and lend tens of billions to banks to keep them liquid (Wednesday’s email and podcast);

* The orchestrated rescue and takeover of Credit Suisse last weekend by Swiss authorities working together in a frantic effort with UBS to stop the Swiss banking system from collapsing (Wednesday’s email and podcast);

* Rate hikes in the United States, Britain, Switzerland and Norway, but a softening of market interest rate expectations because of the banking crises (Wednesday’s email and podcast);

* Statistics showing little improvement in Aotearoa’s child poverty rates and a worsening of the stress on renters, even more so than the stress on mortgage payers (Friday’s email and podcast);

* A call from the Consumer Advocacy Council Chair Deborah Hart for an inquiry into bundling by gentailers of deals on broadband and gas, which she said may restrict competition by making it harder for customers to compare and switch providers (Thursday’s email and podcast).

* Reserve Bank (Te Matua Putea) Chief Economist Paul Conway’s fresh warning to firms and workers not to push for higher real wages and profits in anticipation of higher inflation (Friday’s email and podcast);

* Auckland Mayor Wayne Brown’s casting vote for Auckland Council to pull out of LGNZ (Friday’s email and podcast); and,

* TOP’s launch of a Teal Card and plan to stay out of ministerial roles and not agree to both supply and confidence for either of the main parties (Tuesday’s email and podcast). I also wrote about the Greens’ electoral strategy and performance in Monday’s email and podcast and talk about it with Green MP Julie-Anne Genter in this week’s bonus When The Facts Change podcast episode via The Spinoff.

What we talked about on the ‘hoon’ this week

In this week’s podcast of the weekly ‘hoon’ webinar for paying subscribers at 5pm on Friday night (which you can find up the top of this post) I talked with co-host Peter Bale and political science professorsRobert Patman from the University of Otago and Bronwyn Hayward from the University of Canterbury about:

* Presidents Xi Jinping and Vladimir Putin meeting in Moscow, along with the latest news and views of AUKUS’ military aspirations and Aotearoa’s adjacency to those;

* Russia’s ongoing invasion of Ukraine and how close Xi actually is (or not) to Putin;

* this week’s UN IPCC report warning climate emissions would need to be cut by almost half by 2030, if warming was to be limited to 1.5°C; and,

* this week’s review of the Emissions Trading Scheme announced by the Ministry for the Environment.

We also talked with Natalia Antelava, the Tblisi-based editor-in-chief and co-founder of Codastory about living in Georgia, a nation trying to exist under the shadow of Russia. She also produces the Undercurrents podcast for Audible here, which is about the struggle between tech, democracy, and dictatorship.

Other places I appeared this week

Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues.

I produced my weekly When the Facts Change podcast for The Spinoff on how the Government’s policy bonfire blew up the ETS, and there’s that bonus episode above with Julie-Anne Genter.

The Kākā by Bernard Hickey is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Scoops elsewhere this week

Chart of the week

Almost a quarter of NZ renters spend over 40% of income on rent

Quote of the week

‘I’m leaving the team because I’m more important than the rest of you’

“I’ve always felt that if you’re on your own, they (government) have to come and see us. They need us more than we need them.” Mayor Wayne Brown’s justification for voting this week to pull Auckland Council out of LGNZ.

Profundities, spookies, curiousities and feel-goods

Longer reads and listens for the weekend

Here’s a few useful longer reads, scoops and podcasts for paying subscribers for the weekend.