Not that there was much doubt about it, but Bill English was effectively confirmed yesterday as the next Prime Minister of New Zealand. His selection as National Party leader will be made official with an uncontested caucus vote on Monday.
Judith Collins and Jonathan Coleman dropped out through the afternoon after a trickle of public declarations of support for the Finance Minister turned into a flood late in the morning, with key backbenchers Todd Muller and Chris Bishop proving influential with their endorsements.
But it was the early afternoon appearance by English at Treasury's HYEFU briefing that gave us a better steer on what his cabinet might look like ( Steven Joyce will be Finance Minister) and how his priorities might be slightly different from John Key (he's more interested in house building and helping low to middle income earners than big tax cuts for the rich).
The key details from the HYEFU are below in the Alert we sent yesterday, but the headline is that English is prioritising capital spending, earthquake repairs and debt repayment over tax cuts, and that any tax cuts are likely to be directed at low to middle income earners, rather than the rich.
This is the key paragraph in the Budget Policy Statement: "When it is affordable, and when economic conditions permit, the Government would like to lower income taxes, with a focus on helping lower and middle income earners obtain a greater return from their own hard work. However, responding to the earthquakes and reducing debt are currently of higher priority."
English's statement also pointed out there was no explicit provision for tax cuts in the HYEFU forecasts, and the Government would continue to look at options for lowering tax rates or thresholds in Budget 2017 or after, "as the fiscal situation continues to improve."
However, English's actions in the HYEFU spoke the loudest. The big fiscal news was the Government's decision to increase its capital spending allowances by a total of NZ$5.4 billion over the next four years, including increasing the Budget 2017 allowance by NZ$2.1 billion to NZ$3 billion.
English talked up the Government's plans for NZ$32.1 billion of capital spending over the next five years, up from NZ$18.4 billion over the last five years. He referred to NZ$8.5 billion to be spent in Transport, NZ$3.5 billion in Education and NZ$2.5 billion to be spent in Defence.
He made a point of mentioning Housing NZ's plans to ramp up house building on its land in Auckland, which can handle an extra 39,000 houses under the new Unitary Plan's more intense development rules. Bill English looks set to use some of the fiscal bounty arriving in the Government's coffers to unleash a version of Kiwibuild 'lite' to combat a Labour-Green policy of state house building at the next election.
"There's ongoing discussion about the large scale house building programme," he said when talking about the Government's capital spending plans. He wouldn't spell out the potential scale of it, but it will no doubt feature in the Government's pre-Election thinking.
A slightly impulsive Budget
One aspect of the HYEFU that didn't get a lot of attention was the detail about how much of a fiscal loosening the changes in the HYEFU represented.
The fiscal impulse measure (page 40) showed a fiscal impulse for the current 2016/17 year of 0.9% of GDP, up from 0.5% estimated in the May budget. Treasury said the fiscal impluse was still broadly neutral over the forecast period, with negative impulses of 0.9% in 2018/19 and 0.4% the following year.
However, the collective fiscal impluse in the HYEFU represented a total tightening of 1.3% of GDP, down from a total tightening of 2.3% estimated in the May Budget.
This effectively loosening of fiscal policy by about 1% of GDP is broadly equivalent to the NZ$2-3 billion cost of the Kaikoura earthquake repairs, so it's hard to accuse the Government of any profligacy.
But it's worth keeping an eye on, given any election-eve announcements on tax cuts are yet to be factored into the fiscal track and Graeme Wheeler has repeatedly said in recent months he did not need any fiscal loosening to help him achieve his inflation targets. The corollary is that Wheeler might have to lean back against any tax cuts with higher interest rates than would otherwise be the case.
On that issue of the fiscal and monetary policy tradeoffs around inflation, Wheeler did highlight the potential cost implications of the Kaikoura rebuild in his speech yesterday, saying the NZ$3-8 billion total cost (which includes private and Government spending) would be happening at a time when the domestic economy was running at or near full capacity.
"Some increase in construction cost inflation is likely as this is already running at 7.9 percent in Auckland and 6.3 percent nationally due to capacity bottlenecks within the sector. Increases in freight costs are also expected," he said.
Wheeler was specific in saying the Reserve Bank had not changed its views about needing a flat OCR for the foreseeable future, but tone of the speech was seen as mildly hawkish by some, and the New Zealand dollar rose as high as 72.2 USc yesterday morning after the speech. It has since edged back to 71.8 USc, but has remained solid despite renewed strength in the US dollar against other currencies overnight.
Arguably, the most interesting numerical detail in the HYEFU was Treasury's estimate that labour productivity, the GDP per hour worked, is expected to fall 2.0% in the current year to March 2017, although it cautioned that changes in the Household Labour Force Survey meant that forecast should be treated with caution. Treasury forecast average productivity growth of 0.8% over the forecast period, which is about half that seen over the previous two decades.
This issue of very weak productivity growth is increasingly important globally, but also here, where GDP growth has been driven largely by strong labour force growth because of net migration and increased participation, along with longer hours being worked.
Essentially, there are more New Zealanders working longer hours to create more GDP, rather than the same number of New Zealanders working smarter to produce more in the same time. I talk about this in my weekend column that will be in the Monday email.
Twitpic of the day:
Have a great weekend and check out a few good Weekend Reads below. The crop is not quite so bountiful this week. I wasn't expecting the Prime Minister to resign...
9 December 2016
For the profit and pleasure of subscribers, here's a few longer reads on economic, social and political issues for the weekend.
For people still shaking their heads over Trump's election, this piece from Patricia Cohen at the New York Times is instructive. It includes new research from a group including Thomas Piketty showing how 117 million Americans saw close to zero growth in their real incomes since the 1970s.
"Stagnant wages have sliced the share of income collected by the bottom half of the population to 12.5 percent in 2014, from 20 percent of the total in 1980. Where did that money go? Essentially, to the top 1 percent, whose share of the nation’s income nearly doubled to more than 20 percent during that same 34-year period," she writes.
"Mr. Piketty, Mr. Saez and Mr. Zucman concluded that the main driver of wealth in recent years has been investment income at the top. That is a switch from the 1980s and 1990s, when gains in income were primarily generated by working. That divergence can slow innovation and further entrench inequities, said Heather Boushey, an economist at the Washington Center for Equitable Growth. When labor income provides the primary route to riches, it creates incentives for people to improve their education and work harder, Ms. Boushey explained. But if getting ahead requires already having a stockpile of cash or inheriting a windfall from your parents, then it is much harder to work your way up."
Bob Davis covers the same territory in the Wall St Journal, but with a different twist. He points to research showing about half of American 30 year olds actually earn more than their parents did at the same age. That's down from over 90% in the early 1970s.
"Economists and sociologists from Stanford, Harvard and the University of California set out to measure the strength of what they define as the American Dream, and found the dream was fading. They identified the income of 30-year-olds starting in 1970, using tax and census data, and compared it with the earnings of their parents when they were about the same age," Davis writes. "In 1970, 92% of American 30-year-olds earned more than their parents did at a similar age, they found. In 2014, that number fell to 51%."
Further to the stories about fake news stories, the excellent Craig Silverman reports on an Ipsos poll done for Buzzfeed that found 75% of Americans thought the fake news they'd seen was actually true.
We're getting towards the end of the year so we're starting to see 'best of' lists popping up. This one from Bloomberg of the best news articles others have written is a cracker.
This is a long read from Nick Confessore at the New York Times Magazine on the whole business of hiding money in the offshore financial system. It is fascinating, and doubly so if you've been following the Panama Papers.
Wired's Mustafa El-Bermawy writes here about how 'Your Filter Bubble Is Destroying Democracy". There's more here from Roberto Stefan Foa and Yascha Mounk on how support for democracy is waning among the young, including in New Zealand. It's the most disturbing thing I've read in a long time.
Have a great weekend. And we're now less than a year out from an election...