The politics of money is returning after 30 years in the wilderness



ANALYSIS: While Judith Collins considered appointing Andrew Bayly as her shadow treasurer, disgruntled members of her party told the same story.

In the early days of Simon Bridges’ leadership with Amy Adams as Treasury spokesperson, Bayly was asked to leave and do some work on the retirement plan. What he came back with was radical: some politically unpleasant choices to make retirement more affordable.

Nor was it what the party had in mind when it put Bayly to work. When MPs are subjected to policy work, what they come up with is at least somewhat limited by what is politically possible. Bayly’s solution, however, was pure economics.

The anecdote was told to highlight Bayly’s lack of political nous. Of course, he had the practical experience National needed in a finance position, but his predecessors, Goldsmith, Adams, and Joyce, were also notable politicians.

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The people telling that story probably weren’t reassured by Bayly’s attack on the Reserve Bank last week. The chatter on National Party channels last week was mostly negative. The man who was supposed to restore National’s financial credibility was not meant for his tenure to attack the Reserve Bank.

Looks like Bayly got the hint. Further press releases on his idea to write to the Reserve Bank calling on it to soften the stimulus measures against the housing market, which Bayly alluded to earlier this week, never arrived.

Fast forward a week and Bayly hosted a stand-up on Parliament’s black and white tiles, trying to claim credit for the idea (which usually rests with David Seymour, who kicked off this whole debate with a side- ready-made note to Interest.co.nz back in October).

Bayly was right – the gamble paid off. Collins, spotted in parliament late that night, was delighted, as was Deputy Shane Reti.

Across the aisle, Julie Anne Genter, the Green Party’s new spokesperson, and co-leader Marama Davidson, noted that they were pushing for a more traditional interpretation of what the role of the Reserve Bank should be.

They landed on the same page as Governor Adrian Orr, who said on Wednesday that if you wanted to ease demand-side pressure on housing, the discussion should be rather than monetary policy.

Reserve Bank Governor Adrian Orr provides the official spot rate.  The cash rate remains 1%.

Robert Kitchin / stuff

Reserve Bank Governor Adrian Orr provides the official spot rate. The cash rate remains 1%.

At first glance, this seems to make little sense. Labor, National and ACT, all of which have some connection with the 1989 decision to grant the Reserve Bank operational independence under then-Governor Don Brash, crossed several red lines to breach, however tentative, that independence.

The Greens, who had called for political quantitative easing (the printing of money) just a few elections ago, although not quite saying it, were the only ones pushing for a more orthodox way of doing things.

The reasons why are clear – and this was one of the few weeks in politics where everyone involved got it right.

The big news of the week was everyone’s acknowledgment that New Zealand has a serious problem with housing demand. Until now, the debate has mainly focused on increasing the housing supply, which was and will remain the cause of our housing crisis.

But the cheap money released by the Reserve Bank’s monetary stimulus has also created a demand problem.

The problem for our politicians is that this question of demand isn’t just the Reserve Bank’s fault – one reason why there is so much demand to invest in housing is the massive tax benefits it brings in the form of almost completely untaxed capital gains on houses when they are sold.

But with new housing taxes very firmly off the table for ACT, National and (at least for now) Labor, the money had to be passed on to the Reserve Bank. The many reasons for the problems on the demand side converged into one: the governor of the reserve bank, Adrian Orr.

The Greens, on the other hand, have left everything on the table, including taxes. It fits their political argument to argue that fiscal, rather than monetary policy, is the main lever for solving demand-side problems in the housing market. It certainly helps that the governor of the reserve bank seems to agree – noting that fiscal and regulatory solutions (code for tax and planning reform) are better solutions to the housing problem than blunt monetary policy.

But Robertson has also walked out of the episode and is looking good too. We are firmly in the age of unconventional monetary policy (to borrow the bank’s own language). That means that the bank uses methods other than the official spot rate to achieve its goals. This includes printing wholesale money and cheap bank financing.

This policy has brought the reserve bank and government closer together and has led some to question whether the bank’s full operational independence is a bit passé. After all, Robertson safeguards the bonds that the bank buys. He is also probably the biggest beneficiary of the lenient monetary policy because of the much lower borrowing rates the government is receiving thanks to the bank’s efforts to tame interest rates.

The bank isn’t doing this as a favor to Robertson – it’s a byproduct of its economy-wide efforts to bring back a little bit of inflation and employment – but it certainly doesn’t hurt Robertson to have loan rates so low.

We already see an indication of where things will go. The Reserve Bank has been pretty clear that it doesn’t think Robertson’s suggestions would have forced her to change its monetary stimulus this year – that’s also a bit of a rebuke to Bayly, who also suggested a change in monetary policy in the U.S. bank financing for lending. program designed to provide banks with cheap financing.

Instead, we could see it using other instruments such as the loan-to-value ratio (LVRs) or debt-to-income ratios (DTIs) to cool down demand – although Orr issued a coded warning that some Of the tools available to the bank, hurt first-time homebuyers more than it helps them – both LVRs and DTIs would likely hurt first-time homebuyers.

But the bank could also provide some political assistance to the government. Orr seems to be putting a lot of emphasis on a paragraph in Robertson’s letter calling on the Reserve Bank to assist with the broader policy work the government is doing on housing affordability.

Andrew Bayly's risky play with the Reserve Bank paid off.

ROBERT KITCHIN / Stuff

Andrew Bayly’s risky play with the Reserve Bank paid off.

Orr’s comments this week suggest that if the bank’s wonks think a tax is the best policy solution for Robertson, a tax is exactly what he will recommend.

On the face of it, that would be bad for Robertson. His risky play with the letter could lead Orr to tell Robertson how to do his job, rather than the other way around.

But it can also be very useful. A call from the Reserve Bank to introduce some sort of demand-stifling tax could be what Robertson needs to work his way into the policy solution the government likely wants. Let’s not forget: Robertson started the year breaking (well, just) his first term Budget Accountability Rules with a $ 12 billion stimulus package. The package was largely over thanks to growing political calls for Labor to throw off the rules that forced the party to rule with a form of red-hued austerity.

With even Labor bank economists lecturing on the merits of taxation in the interests of preserving social cohesion, a similar political argument is brewing. Don’t expect a wealth tax, but consider the once-ruled out capital gains tax.

Robertson has said he would not view an extension of the government’s clear line test (from five years to forever) as a violation of the government’s pledge not to introduce new taxes.

But the Bright Line test, which taxes income from investment property sold within five years of purchase, is exactly a capital gains tax (even Treasury thinks so, the 2017 Bright Line test extension review makes it clear that the two taxes are substantial comparable.).

Clear line text may also conflict with Leader Jacinda Ardern’s promise never to implement a CBT under her leadership. Income spokesperson David Parker has an answer: The clear line test is an income tax, not a capital gains tax.

Robertson can make the same point with this argument – National, which introduced the clear line test – arguing that the load was different.

If the political pressure continues to build, don’t be surprised if a clear line test extension is put very firmly on the table.


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