David Parker

Cracks appearing in Labour’s new monetary policy

When Labour’s new monetary policy tool – using a Variable Savings Rate (VSR) to alter the rate at which workers must contribute to Kiwisaver  – I stated:

It’s a fascinating idea, although I’d need to see some fairly detailed modelling to have any idea whether it would actually work.

Well, since the policy has been announced, the majority of financial commentators seem to view it as a useful additional tool for the Reserve Bank, but don’t believe that it will be able to be used as a substitute to the OCR.

A major pitfall is the rate at which a VSR could be altered. The OCR can be adjusted every six weeks, providing a regular ability to adapt to the latest financial figures. However, a VSR would be something that could only be altered infrequently, given the complications for employers in adjusting accounting software for employer Kiwisaver contributions every time the VSR changes.

That means that the OCR would have to remain as the primary tool for curbing inflation, with a VSR making sporadic appearances. That’s not to say that interest rates would not be lower than they otherwise would – however, they, certainly wouldn’t be sitting at the stable low levels that Labour promises with their policy.

Perhaps the biggest problem for Labour is the numbers on what effect a VSR could actually have on inflation. Fran O’Sullivan threw some interesting figures out in the NZ Herald:

But the more interesting comparison is the size of the lever that Wheeler can pull. At February 2014, the residential mortgage pool was $191.8 billion. $75 billion was at floating rates with a further $64.9 billion on one-year rates.

This means it doesn’t take too many rate hikes to suck a few billion dollars out of homeowners’ pockets and reduce demand.

Increasing KiwiSaver contribution rates is not going to have the same blunt – and well-understood – effect.

At June 30, 2013 2.15 million people were enrolled in KiwiSaver – 53 per cent of the eligible population. Labour’s plan to make KiwiSaver compulsory will increase overall saving and is well overdue.

But it’s not a “net net” by any means.

That’s because KiwiSaver contributors are at this stage putting only about $1.5 billion into the scheme each year (2013 figures).

So, what is the relative strength of Labour’s proposed VSR lever, against that of the existing OCR? Here’s where Labour needs to work fast, because the only figures hitting the headlines are those supplied by National, and they’re not good. From Stuff.co.nz:

National had conducted “back of the envelope sums” which suggested that to prevent interest rates going up by 1 per cent, KiwiSaver rates would have to be lifted by 6 cents in the dollar.

Asked about the calculations, Joyce said that raising the OCR by 1 per cent took around $2.5 billion a year from the economy, while a 1 cent increase in KiwiSaver contributions created an additional $400 million, partly because other savings were undermined.

David Parker can argue all he likes that National’s figures are wrong, but it’s those figures that will stick in people’s minds, regardless of Steven Joyce making it clear that he has no idea whether they’re correct:

The figures were developed “in a couple of hours with the help of a couple of boffins” and so were not authoritative, he said. “My point is not so much that that’s the right number…my point is that Labour should have a number.”

And that’s the problem for problem. Without a figure of their own, Labour leaves itself open to scaremongering like this from David Farrar at Kiwiblog:

So what does that means if you are on say $60,000 a year. It means your take home pay will drop by $3,600 a year or a massive $70 a week to stop interest rates rising by 1%.

Now you may not even have a mortgage. Most people do not. Everyone who does not currently have a mortgage will have their take home pay slashed.

But what if you do have a mortgage. Say you have $300,000 owing on it. Let’s say the VSR means your interest rate is at 6% instead of 7%. What difference does that make to your weekly repayments? At 7% a $300,000 20 year mortgage costs you $536 a week. At 6% it is $495 a week so that saves you just $41 a week.

Now I don’t have the foggiest idea about how close or otherwise Steven Joyce’s figures are, but I certainly can’t make much of an evaluation until Labour provides a counter-figure. It’s an attack that Labour should have seen coming, and Parker should have had some numbers on hand. Otherwise Labour risks this becoming a 2014 version of 2011s “show me the money moment.

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Maurice Williamson bites the dust

Maurice Williamson has resigned, following news that he called police in December 2013 to discuss the arrest of Donghua Liu on assault charges. (You may recall Mr Liu from this post, following news that Mr Williamson and Nathan Guy granting citizenship to Mr Liu against the advice of the DIA, after which Mr Liu donated significant funds to the National party).

Mr Williamson has said:

“When I made inquiries with associates, it became clear that there was confusion about whether a prosecution would proceed. I offered to call police and clarify the matter.”

However, the officer who handled Mr Williamson’s inquiry, Inspector Gary Davey, said the following in an email his colleagues:

“He started by saying that in no way was he looking to interfere with the process, he just wanted to make sure somebody had reviewed the matter to ensure we were on solid ground as Mr Liu is investing a lot of money in New Zealand.” [Emphasis added]

Let’s get this straight. A Minister who rubber stamped Mr Liu’s citizenship against official advice (with Mr Liu then donating $22,000 to the National party via his company, Roncon Pacific Hotel Management), calls police when Mr Liu is arrested, and let’s it drop into the conversation that somebody needed to review the matter because “Mr Liu is investing a lot of money in New Zealand”.

That’s a hell of a statement to make if you’re “in no way looking to interfere with the process”. Police make their own decisions about whether to lay charges and whether to proceed to prosecution with those charges. One of the factors that should certainly not be taken into account when police make such decisions is whether that person is splashing around a lot of money.

One can be charitable to Mr Williamson and assume that it was just something that slipped out accidentally; that he honestly had no intention of trying to influence police decision making. However, Mr Williamson’s words had enough of an effect for them to be mentioned in Inspector Davey’s email to his colleagues, and Willimson’s intervention certainly resulted in a police review of the matter (even if – and full credit to police – they pressed ahead with the charge anyway, and have now secured a guilty plea).

Whatever Mr Williamson’s intentions, this is bad news for the National party. Just as it seemed that the Judith Collins saga had died a death in the public mind, along comes a new allegation of corruption against another government minister. The narrative that money buys you ministerial influence gains another thread.

Whether it’s good news for Labour is a different story. Sure, it gives them a new attack line against the government, but it blunts the extensive coverage they had been getting due to their new “Kiwisaver as a monetary policy tool” policy. David Parker won’t be best pleased that all of the political journos will now switch focus to Mr Williamson’s political corpse.

Labour’s new monetary policy tool

Labour has announced its new monetary policy tool – a variable savings rate (VSR) which would allow the Reserve Bank to vary Kiwisaver savings rates. It would be an alternative to raising the OCR to raise interest rates.

It’s a fascinating idea, although I’d need to see some fairly detailed modelling to have any idea whether it would actually work.

The policy is aimed at a number of different targets:

  • There’s the obvious target – reducing interest rates rises. Essentially, the Reserve Bank would use the VSR to take money out of circulation, rather than higher interest rates.
  • There’s exchange rates. Labour argues that our dollar is over-valued, and most analysts seem to agree. Lower interest rates make our dollar less attractive, helping exporters.
  • There’s New Zealand’s woeful savings rates. Labour would be making Kiwisaver compulsory, and the higher the VSR, the higher our level of national savings. According to David Parker, Labour’s finance spokesperson, Labour wants to see the Kiwisaver contribution rate rise from its current rate of 6% to around 9%. That’s a significant increase in national savings…
  • There’s our ever-ongoing annual current account deficit. A lower dollar makes imports more expensive, while making exporting easier. Over time, our current account deficit should diminish.

The policy seems likely to be sold on two fronts. Firstly, it’s a blatant pitch to those with a mortgage – “We’ll keep your interest rates low!” Secondly, judging by David Parker’s language on Radio NZ’s Nine to Noon show, there’ll be a nationalistic attack on overseas banks – “Keep your money in Kiwisaver, rather than giving it away in profit to overseas banks!”

(The second sales pitch seems somewhat dishonest to me. When mortgage rates go up following an OCR increase, term deposit rates increase as well – when New Zealanders with a mortgage pay more, New Zealanders with savings in the bank earn more. Banks have a gap between what they borrow at and what they lend at – that’s where they make their profit (not including the various accounts they charge). Bank profitability isn’t hugely impacted by whether the OCR sits at 3% or 3.25%.)

There are a number of fishhooks and double-edged swords in the policy though. The major fishhook is also a major selling point (to me) of the policy – those with mortgages are a minority in New Zealand; those who earn a wage or salary and would therefore be subject to compulsory Kiwisaver and the VSR are a majority. Any movement in the VSR will therefore directly impact a far wider pool of consumers than would a movement in the OCR. That’s a problem for those with little discretionary income who don’t have a mortgage, but it also makes the tool rather more effective. The Reserve Bank has always had to struggle with the fact that a majority of mortgage funds are often fixed, meaning that increases in the OCR can take longer periods of time to impact on many mortgage holders.

For those with a mortgage and a wage or salary, the benefit of interest rates not rising is offset in the short- to medium-term by increased Kiwisaver payments. Sure, they’ll get those funds back on retirement, but it’s not money that is available for them to reduce their mortgage or otherwise tap into prior to retirement.

Then there’s the issue of the value of the NZ dollar. It’s been high for some time now and consumers appear to have gotten quite used to cheap electronics and the like. Drive the dollar lower and all of those manufactured goods become more expensive, which isn’t crash hot news for consumers, especially not those who have just watched a higher portion of their wage disappear into their Kiwisaver account. Drive the dollar lower and watch the price of imported fuel increase, with all of the flow on effects that entails. There are pros and cons to whatever level the dollar is at. How does the Reserve Bank decide what the “correct” value should be?

Obviously it’s a policy that is going need some further fleshing out. For instance, Labour doesn’t yet know whether the Reserve Bank would have the power to adjust the VSR itself or whether it would have to provide advice to the government of the day on whether it wanted the VSR raised or lowered (presumably, if the government failed to follow that advice, the Reserve Bank would then act using the OCR). However, it’s certainly a policy worthy of broader discussion.

Regardless, the attack lines from the Right are already out. Just look at David Farrar’s headline at Kiwiblog – “Labour proposes a cut in everyone’s after tax income“…