Treasury publishes crisis playbook - favours Official Cash Rate cuts over Government spending and money printing
Lower interest rates are the answer to supporting the economy in a time of crisis, according to Treasury.
But if New Zealand were hit by a natural disaster or more severe trade war, for example, once interest rates were already near rock bottom, the Government should step in with support packages, rather than turn to the Reserve Bank of New Zealand (RBNZ) to print money.
Treasury shared this view in its draft three-yearly Long-Term Insights Briefing released on Thursday.
It said the Official Cash Rate (OCR) was the “most reliable” tool that could be used to lessen economy-wide ups and downs.
“Fiscal policy [government initiatives] should be used sparingly,” Secretary to the Treasury Iain Rennie said.
“Rather, monetary policy [which the RBNZ is responsible for] should take the lead role in smoothing economic cycles and responding to crises affecting the whole country.”
Rennie’s position largely aligns with that of Finance Minister Nicola Willis, who said she would keep
government spending restrictive, despite the potential for a
global trade war to flatten New Zealand’s economic growth.
“This is not a time to dramatically change direction. It is a time to stay the course,” she said.
Meanwhile, financial markets are betting on the OCR being cut by more than what the RBNZ projected in February, before the United States unveiled the extent of its tariffs.
Willis wouldn’t comment on whether she would use money printing, or quantitative easing, should the global trade war escalate to crisis point.
She noted volatility in the bond market, but suggested talk of money printing was premature.
At 3.5%, the OCR is at, or just above, what’s considered to be the neutral rate, which is neither expansionary nor contractionary.
Treasury was wary of the risks associated with money printing and couldn’t say how much the RBNZ’s 2020 and 2021 $55 billion Large-Scale Asset Purchase (LSAP) programme stimulated the economy.
“Alternative monetary policy tools can be effective in supporting monetary policy objectives, although there remains uncertainty about the size and timing of impacts,” Treasury said.
“For example, LSAPs have a clear role in addressing financial market dysfunction, but their impacts outside of this situation have proven harder to estimate.”
Treasury noted the direct cost to taxpayers of the LSAP programme is estimated to hit $10.5b.
It didn’t try to tally up the benefits of the LSAP programme to the Government’s finances, in terms of how the support it provided generated more tax revenue, for example.
Former Reserve Bank Governor Adrian Orr said on numerous occasions he believed the upsides were worth multiples more than the costs.
Treasury said a “careful” analysis of the costs, benefits and risks should be done before the RBNZ printed money again.
It noted it was plausible for New Zealand to find itself in a crisis at a time the OCR was already near zero, as was the case before the pandemic.
While banks are now operationally ready to deal with negative interest rates, Treasury said the Government needed to consider using fiscal policy to support the economy if monetary policy approached its limits.
However, Rennie cautioned; “The experience from the response to Covid-19 shows that fiscal policy is easier to loosen in a downturn or shock but much more difficult to tighten in an upturn. This can lead to debt ratcheting upwards over time”.
Accordingly, he said fiscal policy should be “timely, temporary and targeted”.
Treasury said giving people affected by a particular shock cash payments best met this criterion.
Whereas increasing investment in large complex infrastructure programmes, like the Government did during the pandemic, wasn’t timely and was only moderately temporary and targeted.
Treasury estimated only 30% of the money allocated towards the Covid response entered the economy in the year to June 2020, with 36% of it being spent after June 2022, once inflation was well above target.
It singled out the wage subsidy for being timely and temporary, but less targeted.
Treasury noted New Zealand’s response to Covid was one of the largest among advanced economies, with spending and foregone revenue due to the pandemic estimated to be worth about 20% of gross domestic product (GDP).
Looking ahead, Rennie said; “It is important that the Government maintains low debt levels, so we have the capacity to respond to economic shocks when they occur.
“On average, from the late 1980s to now, we have spent the equivalent of 10% of our annual GDP each decade responding to these shocks.
“We need to make sure we are passing on to future generations that same flexibility we have had so that they are able to respond to the shocks they will undoubtedly face.”
The public has until May 8 to provide feedback on Treasury’s draft Long-Term Insights Briefing. It will publish its final report at the end of June.
The agency still can't pinpoint the benefits of the Covid-era $55 billion LSAP programme.
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